Deluxe Corporation

3680 Victoria Street North
Shoreview, Minnesota 55126-2966
U.S.A.
Telephone: (651) 483-7111
Fax: (651) 481-4163
Web site: http://www.deluxe.com

Public Company
Incorporated: 1920 as DeLuxe Check Printers, Incorporated
Employees: 9,955
Sales: $1.57 billion (2004)
Stock Exchanges: New York
Ticker Symbol: DLX
NAIC: 323116 Manifold Business Forms Printing; 323119 Other Commercial Printing; 454111 Electronic Shopping; 454113 Mail-Order Houses; 522320 Financial Transactions Processing, Reserve, and Clearinghouse Activities; 541214 Payroll Services

Best known as a check printer, Deluxe Corporation continues to be the largest supplier of checks and check-related products and services in the United States. It has diversified its operations, however, and the company's largest unit, and the one on which it intends to base its future, is its Small Business Services unit, which was built mainly through the June 2004, $639.8 million acquisition of New England Business Services, Inc. This unit serves six million small business customers, selling business checks, business forms, stationery, and related products; offering packaging, shipping, and warehouse supplies through an office supply catalog service; and providing payroll services. The Deluxe Financial Services unit supplies checks and related products and services to financial institutions. Direct Checks is the leading direct-to-consumer supplier of checks in the United States. Operating under the Checks Unlimited and Designer Checks brand names, this unit sells personal and business checks and related products via direct response marketing and the Internet. Although the demise of the check has been consistently—and wrongly—predicted for years, its use is slowly declining, providing impetus to Deluxe's diversification efforts.

Early History

The foundation for Deluxe was laid in 1905 when William Roy Hotchkiss purchased a small Wisconsin newspaper named the Barron County Shield Well. Acquainted with the printing business since boyhood, Hotchkiss thought he had found his niche, particularly after he became publisher and co-owner of the more prestigious Dunn County News of Menomonie in 1908. For the next five years Hotchkiss oversaw the development of this paper into the largest and most respected weekly in the state. A protracted illness, however, forced his early retirement from the newspaper business and his relocation to the more congenial climate of southern California. His entrepreneurial drive still intact, Hotchkiss decided to raise chickens but failed, despite conceiving the idea of selling precut chickens to grocery stores.

In 1915 Hotchkiss returned to the Midwest and settled in St. Paul, vowing, according to company annals, "to do one thing and one thing only, but do it better, faster and more economically than anyone else." Recalling his printing days and a special assignment of printing bank checks for a friend, Hotchkiss decided to claim the creation and marketing of personalized checks as his business. The distinctive feature of his checks would be quality imprinting of information unique to each customer. Hotchkiss borrowed $300 to secure the necessary equipment and a small office in the People's Bank Building in downtown St. Paul. In the two months of operations for 1915 the eager salesman attracted $23 in orders against $293 in expenses. Despite such unpromising numbers, the company would soon find success. As Terry Blake wrote in A History of the Deluxe Corporation, 1915–1990 , several factors favored Hotchkiss's enterprise, particularly the printer's choice of location. The Minneapolis/St. Paul area, already densely populated with financial institutions, was destined to become a major national banking center—and therefore a major check clearinghouse—through Minneapolis's selection as the site of the Federal Reserve Bank of the Ninth District. Equally important was Hotchkiss's timing. In 1915 approximately five billion checks were issued by American businesses each year. This immense market was being served by various printing houses, none of which was more than regionally dominant, particularly noteworthy for its service, or even remotely prepared to foster new business in a virtually untapped domain: individual consumers.

Hotchkiss's early marketing of his company's services consisted of mail-order brochures sent to all regions of Minnesota. His first customers were healthy outstate banks, with less deposits than the Twin Cities banks but also far fewer check-printing competitors. In 1916 Hotchkiss succeeded in tapping the metropolitan market with contracts from both the People's Bank and the Western State Bank of St. Paul. Sales for his first full year of business reached $4,173. This same year Hotchkiss welcomed printer Einer Swanson as a business partner. Swanson replaced Hotchkiss as chief salesman and may also have been responsible for determining the company's name. The new arrangement allowed Hotchkiss, an instinctive inventor, the freedom to design and develop new machinery to enhance printing quality, speed delivery time, and save money. By 1918 the company's sales had soared to $18,961 and Hotchkiss issued his first catalog. The following year, as sales more than doubled, the company relocated to its first, full-sized plant. In 1920 Swanson and Hotchkiss incorporated as DeLuxe Check Printers, Incorporated and became equal partners.

Growth during the 1920s was phenomenal because of both timing and the special imprint of Hotchkiss's vision. From the beginning he had decided that his business would emphasize quality and service. Service, for him, became synonymous with speed; he instituted the still standing company goal of 48-hour turnaround on any order, or "in one day, out the next." As the Federal Reserve established new banking districts, Deluxe, as soon as it was able, moved in to claim its share of the check business. First came Chicago, then Kansas City, then Cleveland, then New York. By the end of the decade, sales and net income had risen to $579,000 and $42,000, respectively.

Perhaps more indicative of the company's long-term prospects were Hotchkiss's unique advancements in check products and printing technology during the 1920s. In 1922 he developed one of the first small pocket checks—nicknamed the LH, or "Little Handy"—to complement the larger, end-register-style business check. The initial market for this new check was to be the wise and discerning consumer. As catalog copy from this era declared, "The Individualized Check today is considered almost as necessary in leading social and business circles as the calling or business card. It marks the user as a man of distinction and discrimination." Yet, as Blake pointed out, "Hotchkiss had no definite strategy for marketing the personalized Handy checks. Bankers, too, were skeptical of the horizontal register and deemed Hotchkiss's invention a fad. As a result, the LH, destined to become the most successful product in Deluxe's history, remained an obscure novelty for a number of years." Hotchkiss realized more immediate profits from a series of important, speed-enhancing inventions, which included the Hotchkiss Imprinting Press (HIP), patented in 1925; a two-way perforator, perfected the same year; and the Hotchkiss Lithograph Press (HLP), patented in 1928.

Revolutionary Sales Program During Great Depression

An end to a free-spending era came with the stock market crash in 1929. From 1920 to 1929, Deluxe saw sales increase by an average of 32.3 percent annually. By comparison, from 1930 to 1939, sales increased only 55 percent for the entire ten-year span. After suffering its only full-year loss in 1932, the company began to rebound as newly elected President Franklin D. Roosevelt's sweeping reforms for the banking industry took hold. A potentially devastating period was transformed and, like F.D.R., Deluxe hastened the transformation with a revolutionary new sales program. The program was guided not by Hotch-kiss but by George McSweeney, a former Deluxe paper supplier hired by the company in 1932 expressly for the task of building a sales force and boosting revenue. McSweeney emphasized personalized attention over catalog promotions and worked closely with bankers in developing personalized check programs. Viewing Deluxe as a service-(rather than product-) oriented business, he sought ways to aid financial institutions in boosting their own incomes. Promoting small checking accounts for individual customers, all of whom represented potential loan clients, became a mutual goal, and the LH, the mutually agreed upon tool to attract these customers. McSweeney also directed his sales force to refocus attention on serving rural banks; by 1939, this segment had grown to represent 58 percent of Deluxe's annual revenue. Finally, McSweeney instilled in his sales force a "guidance and counsel" approach. With the passing of the Social Security Act in 1935 came an opportunity for McSweeney and his representatives to thoroughly research the law and then educate their banking customers. "To Mc-Sweeney," writes Blake, "it was important for Deluxe to establish itself as a leader, and Deluxe's impressive anticipation of an industry-altering event like Social Security set a precedent the company has always followed."

In 1940 Deluxe saw sales surpass $1 million. A year later, McSweeney became company president at his own request. LH orders had multiplied from 1,000 in 1938 to 100,000 and would continue to grow exponentially. With World War II and the ration banking program that necessitated new ration checks, sales also jumped dramatically. A new service-monitoring system was instituted by Production Superintendent Joe Rose in 1948. Within a year, two-day delivery fulfillment advanced from 75 percent to nearly 90 percent. The advent of the teletype-setter and new plant construction in Chicago, Kansas City, and St. Paul capped the decade.

Steady Growth Continuing: 1950s–80s

During the 1950s, overall sales rose by 275 percent. Much of the company's growth could be attributed to the widespread popularity of the LH. Equally important was Deluxe's national coverage of the commercial banking industry. By 1960 it had contracted for a portion of sales with 99 percent of the country's commercial banks. Meanwhile, Deluxe's largest competitor, New York-based Todd Company, was struggling to hold market share after a corporate takeover. With ten plants strategically spread across the United States to better serve its customers, Deluxe could boast sales of $24 million and anticipate a bright future, with steadily rising numbers for total domestic checks written, which numbered nearly 13 billion. Furthermore, many bankers now accorded Deluxe special status as an industry leader. This was particularly true after Deluxe's fundamental involvement with the development of magnetic ink character recognition (MICR), which after years of back-and-forth negotiations between the American Bankers Association, leading high-tech companies, and check printers, was becoming the industry norm.

With McSweeney's death in 1962 and the continuing maturation of MICR technology came numerous changes for the company. McSweeney's successor, Joe Rose, was faced with dire predictions that a checkless society would be a reality by 1970. Deluxe's recourse was to embrace MICR for all types of document processing and to launch a New Products Research Division. By 1967, sales for the three-year-old division from loan coupon books, process control documents, and deposit/withdrawal slips topped $1 million. Deluxe underwent another difficult, though ultimately beneficial, change in 1965 when it went public after pressure from various estates who complained of the artificially low trading prices for their stock. This same year, Rose satisfactorily settled another potential setback when the U.S. Post Office announced new coding and presorting regulations. A major user of the public mails, Deluxe could ill afford increased expenses or undue delays caused by the new regulations. Consequently, Rose met directly with the deputy postmaster general and obtained permission to establish his own in-plant post offices where mail could be easily sorted and sent to save the company and the local post offices both time and money. Rose closed the 1960s with more than $85 million in sales.

Despite serious inflation during the 1970s, which caused production costs to rise, Deluxe performed well. By 1979 sales had risen to $366 million and net income to $39 million. This was especially impressive after considering the large capital expenditures involved in new plant openings, which arose at the pace of three per year. A considerable amount of new equipment, including minicomputers and the Deluxe Encoder Printer (DEP), also made their debut during this decade. Under Gene Olson, who became president in 1976 and CEO in 1978 (and stayed in these positions until 1986), Deluxe acceded to critics on Wall Street—long wary of the company's dependency on essentially one product—and cautiously diversified into preinked endorsement stamps.

Growth continued unabated during the 1980s; by 1988 sales had surpassed $1 billion. Among the new products that kept Deluxe firmly in place as a financial products market leader were three-on-a-page, computer-form business checks, pegboard checks, and money market related documents. Although the financial industry suffered repeatedly by failures of large-sized banks, such developments actually increased Deluxe's competitiveness, for as the institutions failed, numerous small check printers ceased business as well. By 1989, less than 10 full-service printers remained. In one sense, however, such events were singularly frightening, for few could anticipate the future of banking. Harold Haverty, a 32-year company veteran elected president in 1983 and CEO (the company's fifth) in 1986, wrestled anew with the problem of diversification (analysts for Forbes had twice predicted the company's downfall, because of its traditionally cautious acquisition policy). In part to satisfy the analysts, but also to increase its presence as a provider of wide business services, Deluxe purchased ChexSystems in April 1984, John A. Pratt and Associates in June 1985, and Colwell Systems in October 1985, consequently entering such new fields as account verification, marketing services, and direct-mail supply to the dental and medical industry. In December 1986 Deluxe purchased A.O. Smith Data Systems and instantly became a leader in the burgeoning electronic funds transfer (EFT) industry. In 1987 the company purchased Current, which soon became touted as "the nation's largest direct mail marketer of greeting cards and consumer specialty products." The following year, in a move symbolic of the company's diversification, Deluxe Check Printers, Inc. became simply Deluxe Corporation.

First Serious Difficulties, in Early 1990s

Under Haverty's direction, Deluxe stayed on the same course through the early 1990s, continuing to cautiously diversify. In 1990 ACH Systems was acquired to bolster the company's electronic funds transfer operation. Deluxe, the following year, acquired the Seattle-based Electronic Transaction Corp., which provided electronic check authorization services for retailers. The acquired firm managed the Shared Check Authorization Network (or SCAN), an association of retailers nationwide who exchange information on bad checks and closed customer accounts. In 1993 Deluxe bought PaperDirect, a mail-order supplier of specialty papers and other products, while 1994 brought National Revenue Corporation, a leading U.S. collections agency, into the company fold.

By 1993 it was becoming evident that not all was well at Deluxe. Although revenues continued their yearly rise, return on equity dropped below 25 percent for the first time in years to 17.4 percent. Net income fell substantially as well, from $202.8 million in 1992 to $141.9 million in 1993, due in part to a restructuring charge incurred as a result of the closure of about one-fourth of the company's check-printing plants, which were made redundant by other, higher tech plants. For the first time in company history, workers were laid off.

The company would continue to struggle for the next several years, buffeted by a variety of factors. The bank merger mania of the mid-1990s resulted in larger institutions that could demand lower check prices. Its check-printing business was also being pressured by new competition from more than two dozen marketers using direct mail to sell checks to consumers. At the same time, its efforts at diversification were not paying off; although the new businesses were generating more than 35 percent of overall company revenues, they were contributing less than 10 percent of the profits.

Restructuring Under Blanchard: 1995–2000

It was thus in this troubled environment that for the first time ever Deluxe looked outside for new leadership. In May 1995 John A. "Gus" Blanchard III was named the company's sixth CEO (and then became chairman as well the following year). Blanchard had gained plenty of experience helping companies deal with technology change through stints at AT&T and General Instruments Corp. Once onboard at Deluxe, he moved quickly and decisively to restructure and streamline operations; to identify noncore, underperforming business that should be divested; and to reestablish growth through new products, alliances, and acquisitions.

In early 1996 Deluxe announced plans to trim operating costs by $150 million over a two-year period. Included herein was the planned closure of 26 of the company's 41 check-printing plants, a 30 percent reduction in capital spending, the implementation of a centralized purchasing function, and layoffs for 30 percent of the company's officers. Divested in 1996 were T/Maker Company (a maker of clipart and children's multimedia software, just acquired in 1994), Health Care Forms, Financial Alliance Processing Services, Inc. (a processor of credit and debit card transactions, just acquired in early 1995), Deluxe U.K. forms, and the internal bank forms business. Deluxe also placed PaperDirect and Current Social Expressions (i.e., the greeting cards, gift wrap, and related products—the Current Checks direct-mail operation was to remain with Deluxe) on the block, although it ran into initial trouble trying to find a buyer.

A restructuring of the remaining operations left Deluxe with four main business segments in 1997. Deluxe Paper Payment Systems consisted of the check printing services that remained the company's core, including Current Checks and Deluxe Canada Inc., which had been formed in 1994 to provide Canadian financial institutions with checks and financial forms. Deluxe Payment Protection Systems included account verification (ChexSystems), check authorization (SCAN), and collection agency (National Revenue) services, as well as the TheftNet employee screening service run by Deluxe Employment Screening Partners, Inc., a new subsidiary established in 1996. Deluxe Direct Response specialized in the development of targeted direct-mail marketing campaigns for financial institutions, with four of its five units having been acquired or established in 1996 and 1997. Finally, Deluxe Electronic Payment Systems, Inc. grew out of the 1986-acquired A.O. Smith Data Systems and concentrated on electronic funds transfer services.

Blanchard's dramatic moves had quickly transformed Deluxe Corporation into a much more focused and strategically structured organization at a time when checks—though hardly dinosaurs—were beginning to show signs of decline. Checks had been growing at a rate of 6 percent a year in the early 1990s, but grew less than 1 percent in 1996—EFTs, telephone banking, and online banking were finally having a real impact.

In 1997 Deluxe began offering check ordering over the Internet. The following year brought several divestments. PaperDirect and Current Social Expressions were finally offloaded, as were the Deluxe Direct Response unit and the renamed ESP Employment Screening Partners subsidiary. Continuing to trim noncore operations, Deluxe sold NRC, its collection agency business, in December 1999. On the acquisition side, the company in February 2000 spent $97 million for Designer Checks, Inc., a producer of specialty design checks and related products for direct sale to consumers.

In the meantime, the company had acquired eFunds Corporation, a provider of electronic check conversion and electronic funds transfer services, for $13 million in February 1999. Then in January of the following year, Deluxe announced plans to combine all of its electronic payment and information technology businesses, including eFunds, Deluxe Payment Protection Systems, ChexSystems, and SCAN into a single entity, and then spin it off into an independent publicly traded firm called eFunds Corporation. These moves were designed to create two separate, "pure-play" companies, thereby unlocking value for shareholders. In June 2000 eFunds was taken public through an IPO of 12 percent of its stock, raising $71 million. In December of that year the remaining 88 percent stake was distributed tax free to Deluxe shareholders as a stock dividend. Blanchard left Deluxe to become chairman and CEO of eFunds. Taking over as chairman and the seventh CEO of Deluxe was Lawrence J. Mosner, who had been vice chairman and who had joined the company in November 1995 as president of Deluxe Direct.

Early 2000s: Newly Focused, Diversifying Through NEBS Acquisition

Deluxe, now focused exclusively on paper payment services, divided its operations into three segments in 2001: Financial Services, supplier of checks and related products and services to financial institutions; Direct Checks, direct-to-consumer supplier of checks; and Business Services, seller of checks, forms, and related products to small business/home office customers. According to the company's estimates, the total number of checks written by individuals and small businesses began to decline that year. The 2001 net sales of $1.28 billion represented only a small increase over the previous year, while net income jumped 15 percent, to $185.9 million.

In 2002 the Financial Services unit rolled out a new program called DeluxeSelect aimed at bolstering revenues when customers reorder checks from their bank or credit union. Under the program, Deluxe would take over the handling of such orders either over the telephone, via the company's voice response system, or through the Internet. Pilot programs showed that revenue increased by as much as 50 percent when the more marketing savvy Deluxe salespeople handled the reorders compared to when the financial institution fulfilled them.

In 2003 the use of checks continued to fall because of increasing use of credit cards, debit cards, and electronic payments. Deluxe responded with plans to close three more printing plants, which shaved 635 jobs from the payroll and entailed restructuring charges of $11.8 million. The following year the company began targeting the wider small business printing market as an area of potential growth. A big step in this direction was taken in June 2004 when New England Business Services, Inc. (NEBS) was acquired for $639.8 million in cash, plus the assumption of $160 million in debt. Based in Groton, Massachusetts, NEBS had a customer base of 3.1 million small businesses in the United States, Canada, the United Kingdom, and France, selling them checks, computer forms, stationery, and packaging supplies via direct marketing, direct mail, and an in-person sales force. The deal was viewed positively by many observers, who saw Deluxe diversifying itself through the addition of a highly complementary business. NEBS was merged with the Business Services unit to create the Small Business Services unit, which was the largest of Deluxe's three units. NEBS's European operations were sold off in late 2004. The impact of the acquisition was felt immediately as revenues that year jumped to $1.57 billion.

Late in 2004, however, Deluxe lost one of its largest bank clients, Wells Fargo & Company. This was a key factor in a 19 percent drop in net profits in the first quarter of 2005. Revenue for the same period surged 41 percent, a jump wholly attributable to the NEBS acquisition. It was an open question whether this one deal would be enough to offset the steady decline in Deluxe's core check-printing business. Check use was now declining at a rate of about 4.5 percent per year. It appeared that this challenge was to be faced by a new Deluxe CEO as Mosner announced that he planned to retire in 2005.

Principal Subsidiaries

Chiswick, Inc.; Designer Checks, Inc.; Direct Checks Unlimited, LLC; Deluxe Financial Services, Inc.; Deluxe Financial Services Texas, L.P.; Deluxe Mexicana S.A. de C.V. (Mexico; 50%); DGBS (UK) Forms Limited; DGBS (UK) Holdings Limited; DLX Check Printers, Inc.; DLX Check Texas, Inc.; McBee Systems, Inc.; NEBS Business Products Limited (Canada); NEBS Business Stationery Limited (U.K.); NEBS Capital (Canada); NEBS Payroll Service Limited (Canada); New England Business Services, Inc.; Paper Payment Services, LLC; PPS Holding Company, Inc.; Rapidforms, Inc.; Russell & Miller, Inc.; Safeguard Business Systems, Inc.; Safeguard Business Systems Limited (Canada); Shirlite Limited (U.K.); Sigma Afterprint Services Limited (U.K.); Stephen Fossler Company; VeriPack, Inc.

Principal Operating Units

Small Business Services; Financial Services; Direct Checks.

Principal Competitors

John H. Harland Company; Clarke American Checks, Inc.; American Banknote Corporation.

Further Reading

Abelson, Reed, "The Check Is in the (Electronic) Mail," Forbes , January 6, 1992, p. 99.

Barthel, Matt, "To Bolster Checks, Deluxe Buys Authorization Service," American Banker , January 4, 1991, p. 3.

Bills, Steve, "Core Business Shrinking? Try Another One," American Banker , January 31, 2005, p. 1.

——, "Printers' Divergent Responses to Check Drop," American Banker , May 14, 2004, p. 13.

Blake, Terry, A History of Deluxe Corporation, 1915–1990 , St. Paul: Deluxe Corporation, 1990, 48 p.

Blumenthal, Robin, "Deluxe's Divide," Barron's , February 15, 1999, p. 20.

Byrne, Harlan S., "Deluxe Corp.: Diversifying Against Check-Free Banking," Barron's , April 26, 1993, pp. 39–40.

Chithelen, Ignatius, "Printing Money," Forbes , March 18, 1991, p. 116.

Deogun, Nikhil, "Deluxe Intends to Splits Its Operations, Take Two Technology Businesses Public," Wall Street Journal , January 31, 2000, p. C11.

DePass, Dee, "Cashing Out," Minneapolis Star Tribune , January 17, 2002, p. 1D.

——, "Deluxe Corp. Sells Two Units, Reports Earnings Increase," Minneapolis Star Tribune , October 23, 1998, p. 1D.

——, "Deluxe's Mosner to Retire As CEO, Chairman," Minneapolis Star Tribune , December 14, 2004, p. 1D.

——, "Deluxe Targets E-Commerce," Minneapolis Star Tribune , April 23, 1999, p. 1D.

——, "Deluxe to Split into Two Separate Public Companies," Minneapolis Star Tribune , February 1, 2000, p. 1D.

——, "Deluxe, Two Others Plan 'Debit Bureau,' " Minneapolis Star Tribune , January 29, 1998, p. 1D.

——, "Deluxe Will Buy eFunds," Minneapolis Star Tribune , February 4, 1999, p. 3D.

Krol, Carol, "Deluxe Agrees to Acquire NEBS," BtoB , June 7, 2004, p. 15.

Kutler, Jeffrey, "Three ACH Operators Band Together," American Banker , April 20, 1992, p. 3.

Levy, Melissa, "Checkmaker Deluxe Acquires Financial Direct Marketing Firm," Minneapolis Star Tribune , July 8, 1997, p. 1D.

Marjanovic, Steven, "Deluxe Reorganization Targets Revenue Growth," Minneapolis Star Tribune , April 26, 1999, p. 14.

——, "Though Hedging, Deluxe Isn't Writing Off Checks," American Banker , March 26, 1997, p. 4.

Melcher, Richard A., "Deluxe Isn't Checking Out Yet," Business Week , February 26, 1996, pp. 94, 96.

Sawaya, Zina, "The Underpaid: Relative Pain (Harold Haverty)," Forbes , May 27, 1991, p. 222.

Serres, Chris, "Deluxe Diversifies with Deal: $747 Million for Maker of Business Forms," Minneapolis Star Tribune , May 18, 2004, p. 1D.

Zemke, Ron, and Dick Schaaf, "Deluxe Corporation," The Service Edge: 101 Companies That Profit from Customer Care , New York: New American Library, 1989.

—Jay P. Pederson

—update: David E. Salamie