Deluxe

Describe business risk and financial risk of Deluxe in the coming years. What is impactof risks on financing requirements? (Qualitative answer only)?

Business Risk:1.

Existing products is in mature life cycle stage and CEO anticipates decline in demand ofexcising products in future. With the advent of new technologies such as ATM, Credit/DebitCard and e-transfer, existing product may become obsolete day by day. This leaves littlescope for new product innovation in existing line of business. As noted by CEO, industry hasalmost reached an inflection point from where demand for existing product is going to onlydecline.2.

Retreating point from case that CEO is predicting the downfall of the check printing business, it is very much possible that electronic payments would be the business that killsthe check printing industry. In this view, spun off of eFunds increases the risk in the sensethat DC would lose growth opportunity to eFunds. Further, DC lost diversification byspinning-off two companies (eFunds and iDLX). These companies could have provided avery different business than the check printing business DC was in.3.

The printing business generally works on big economies of scale, and thus only a few participants dominate the market. This creates possibility of a price war, a potential risk infuture.Financial Risk:1.

Financial forecast shown in Exhibit 4 indicates increasing free cash flow generation from$212 mln in 2002 to $229.7 mln in 2006. Cash position is increasing to $625 mln in 2006,while Debt level remains constant at $161.5 mln. Sales growth is forecasted to be modest ataround 2% with operating margin staying stable at around 26.7%. Off course, Interestcoverage remains healthy in forecast due to above mentioned factors. So financial forecast assuch does not portray worrisome picture. However, above mentioned business risk andincreasing shareholder pressure uplifts uncertainty around forecast and overall financialwherewithal of DC.We should...