Duluxe Student Spreadsheet (F'23)

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University of Waterloo *

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Finance

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Jan 9, 2024

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Please note: Copyright © 2005, by the University of Virginia Darden School Foundation. This spreadsheet supports STUDENT analysis of the case, "Deluxe Corporation" (Case 31). This is a working model. Assumptions / Inputs presented can be changed to vary the results. Please press F9 to recalculate results after changing assumptions. This model contains an intentional circularity. To resolve this circularity, please set Excel to recalculate the model a number of times (20 to 50). See TOOLS/OPTIONS/CALCULATION, and check ITERATION.
Bond Rating Rating AAA AA A BBB BB B 23.4 13.3 6.3 3.9 2.2 1.0 Estimate of Debt Capacity (for middle range of each rating) Expected EBIT ? ? ? ? ? ? $ interest implied (by this rating's EBIT coverage) ? ? ? ? ? ? Kd 5.47% 5.50% 5.70% 6.30% 9.00% 12.00% Debt capacity (for this rating) ? ? ? ? ? ? less: Deluxe existing debt (Exh.3) $161 $161 $161 $161 $161 $161 ? ? ? ? ? ? COMPUTE TARGET LEVERAGE AND WACC (for each rating): Tax rate 38% Cost of equity (Bancorp estimates Exh.8) BancKe 10.25% 10.35% 10.50% 10.60% 12.00% 14.25% ? ? ? ? ? ? Keep Total Capital (D + E) Constant (i.e., Extra Debt is swapped for Equity) [WHY?] Equity, Market Value after swap total D / E (at total debt capacity, at this rating) Target D / (D+E) estimated WACC (Bancorp) Target EBIT interest coverage ( x ) (Exh.6) Pretax cost of debt (Exh. 8 or 9 ) Unused debt capacity (for this rating) Equity, Current Mkt Value (Exh.1)
Cost of equity [CAPM instead of Bancorp] AAA AA A BBB BB B Rf 4.46% Market Risk Premium 6.00% Deluxe Current (levered) equity beta (Exh.1) 0.85 Deluxe Unlevered (asset) beta ? Beta Relevered to new D/E ? ? Ke CAPM at this rating ? ? ? ? ? ? WACC at this rating ? ? ? ? ? ? Sensitivity analysis: Worst-case EBIT ? ? ? ? ? ? Interest coverage, at Total debt level implied above ? ? ? ? ? ? i.e., if choose AAA debt level, Implication for rating? Simple DCF, growing perpetuity AAA AA A BBB BB B estimated WACC% (our estimates) perpetual growth rate in FCFF 2% est. Intrinsic TEV = PV_FCFF (g%, wacc, perp) Value effect of optmizing leverage: Initial WACC using CAPM: initial leverage ?? Kd 5.47% Ke ?? Initial WACC ?? Estimated gain from minimized WACC ?? FCFF (2002, i.e. current/prior year; Exh 4)
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, and EBIT =200 instead of expected EBIT above
Exh. 1 Page 5 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Selected Income Statement Information Net sales $1,534.4 $1,581.8 $1,747.9 $1,858.0 $1,895.7 $1,919.4 $1,931.8 $1,650.5 $1,262.7 $1,278.4 Operating expenses $722.2 $739.5 $797.3 $819.4 $862.4 $806.7 $805.9 $688.9 $417.9 $421.1 Profit from operations $812.2 $842.3 $950.6 $1,038.6 $1,033.3 $1,112.7 $1,125.9 $961.6 $844.8 $857.2 Interest expense $15.4 $10.3 $11.3 $14.7 $12.0 $9.7 $9.7 $9.5 $10.8 $5.6 Net earnings $202.8 $141.9 $140.9 $87.0 $65.5 $44.7 $143.1 $203.0 $161.9 $185.9 Common shares, end of year (000s) 83,797 82,549 82,375 82,364 82,056 81,326 80,481 72,020 72,555 64,102 Common shares repurchased (000s) (2,197) (1,341) (1,191) (1,414) (1,715) (1,833) (9,573) (48) (11,332) (3,898) Common shares issued (000s) 949 1,167 1,181 1,106 985 988 1,112 583 2,890 1,255 $2.42 $2.09 $1.71 $1.15 $1.65 $2.15 $2.34 $2.64 $2.34 $2.70 Dividend per share $1.34 $1.42 $1.46 $1.48 $1.48 $1.48 $1.48 $1.48 $1.48 $1.48 Selected Balance Sheet Information Working capital $330.9 $386.9 $224.5 $130.4 $12.3 $108.1 $131.0 $167.8 $14.0 $116.6 Net property, plant, & equipment $389.0 $401.6 $461.8 $494.2 $446.9 $415.0 $340.1 $294.8 $174.0 $149.6 Total assets $1,199.6 $1,252.0 $1,256.3 $1,295.1 $1,176.4 $1,148.4 $1,171.5 $992.6 $649.5 $537.7 Long-term debt $115.5 $110.8 $110.9 $111.0 $108.9 $110.0 $106.3 $115.5 $10.2 $10.1 Common stockholders' equity $829.8 $801.2 $814.4 $780.4 $712.9 $610.2 $606.6 $417.3 $262.8 $78.6 Book value: LT debt/capital 12.2% 12.1% 12.0% 12.5% 13.3% 15.3% 14.9% 21.7% 3.7% 11.4% Market value: LT debt/capital 2.9% 3.6% 4.9% 4.4% 3.9% 3.8% 3.5% 5.5% 0.6% 0.4% Selected Valuation Information (year-end) Deluxe Corp. stock price $ 46.75 $ 36.25 $ 26.38 $ 29.00 $ 32.75 $ 34.50 $ 36.56 $ 27.44 $ 25.27 $ 41.58 S&P 500 Composite Index 418.17 464.30 462.62 576.70 700.92 941.64 1,072.32 1,281.91 1,364.44 1,104.61 17.60x 19.00x 17.40x 25.90x 20.60x 15.40x 14.30x 12.70x 10.20x 11.01x 24.38x 24.11x 18.36x 16.92x 20.26x 23.88x 27.45x 31.43x 26.29x 29.50x Deluxe Corp. market/book ratio 4.72x 3.73x 2.67x 3.06x 3.77x 4.60x 4.85x 4.74x 6.98x 33.91x Deluxe Corp. Beta 1.00 1.00 1.00 0.95 0.90 0.95 0.85 0.90 0.90 0.85 Yield on 20 year T-bonds 7.67% 6.48% 8.02% 6.01% 6.73% 6.02% 5.39% 6.83% 5.59% 5.74% Yield on 90-day T-bills 3.08% 3.01% 5.53% 4.96% 5.07% 5.22% 4.37% 5.17% 5.73% 1.71% Total annual ret. on large co. stocks 7.67% 9.99% 1.31% 37.43% 23.07% 33.36% 28.58% 21.04% -9.11% -11.88% Notes: Earnings per share 1 Deluxe Corp. average P/E 2 S&P 500 Composite average P/E 2
Exh. 2 Page 6 Exhibit 2 Deluxe Corp. Consolidated Statement of Income (in U.S. $ millions) Years ended December 31 2001 2000 Revenue $1,278.4 $1,262.7 Cost of goods sold 453.8 453.0 Selling, general, and admin. expense 514.4 518.2 Goodwill amortization expense 6.2 5.2 Asset impairment and disposition losses 2.1 7.3 Total costs 976.4 983.8 Profit/(loss) from operations 302.0 278.9 Interest income 2.4 4.8 Other income (1.2) 1.2 Interest expense (5.6) (11.4) Earnings/(loss) before taxes 297.6 273.4 Tax expense 111.6 104.0 Discontinued operations income/(loss) - (7.5) Net earnings/(loss) $185.9 $161.9 Source of data: Company regulatory filings.
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Exh. 3 Page 7 Exhibit 3 Deluxe Corp. Consolidated Balance Sheets (in U.S. $ millions) 2001 2000 Assets Current assets Cash and cash equivalents $9.6 $80.7 Marketable securities - 18.5 Trade accounts receivable – net 37.7 46.0 Inventories 11.2 11.3 Supplies 11.1 11.8 Deferred income taxes 4.6 7.4 Prepaid expenses and other 9.9 12.0 Total current assets 84.0 187.8 Long-term investments 37.7 35.6 Property, plant, and equipment – net 151.1 174.0 Intangibles – net 115.0 134.5 Goodwill–net 82.2 88.4 Other noncurrent assets 67.9 36.2 Total assets $537.8 $656.4 Liabilities and Stockholders' Equity Current liabilities Accounts payable $52.8 $44.7 Accrued liabilities 162.9 148.5 Short-term debt 150.0 - Long-term debt due within one year 1.4 100.7 Total current liabilities 367.1 293.9 Long-term debt 10.1 10.2 Deferred income taxes 44.9 51.1 Other long-term liabilities 37.0 38.3 Total liabilities 459.1 393.5 Common stockholders' equity Common shares 64.1 72.6 Additional paid-in capital - 44.2 Retained earnings 14.6 146.2 Unearned compensation 0.1 0.1 Accum. other comprehensive income - (0.2) Total common stockholders' equity 78.7 262.9 Total liabilities and stockholders' equity $537.8 $656.4 Source of data: Company regulatory filings.
Exh. 4 Page 8 Exhibit 4 Deluxe Corp. Financial Forecast, 2002-2006 (values in U.S. $ millions) Actual Projected 2001 2002 2003 2004 Annual increase in sales 1.2% 1.4% 1.6% 2.0% Operating profit/sales 23.6% 26.6% 26.7% 26.7% Tax rate 37.0% 38.0% Working capital/sales 9.1% 9.1% Dividend payout ratio 52.0% Income Statement Net sales $1,278.4 $1,296.3 $1,317.0 $1,343.4 Operating profit 302.0 344.8 351.6 358.7 Interest expense, net 3.2 4.0 4.0 4.0 Pretax income 298.8 340.8 347.6 354.7 Tax expense 111.6 129.5 132.1 134.8 Net income 187.1 211.3 215.5 219.9 Dividends 94.9 94.9 94.9 94.9 Retentions to earnings $92.2 $116.4 $120.7 $125.0 Balance Sheet Cash $9.6 $124.3 $243.1 $365.8 Working capital (without debt) 116.6 118.2 120.1 122.5 Net fixed assets 151.1 151.1 151.1 151.1 Total assets 277.2 393.6 514.3 639.3 Debt (long- and short-term) 161.5 161.5 161.5 161.5 Other long-term liabilities 37.0 37.0 37.0 37.0 Equity 78.7 195.2 315.8 440.9 Total capital $277.2 $393.6 $514.3 $639.3 Free Cash Flows EBIT $344.8 $351.6 $358.7 Less taxes on EBIT (131.0) (133.6) (136.3) Plus depreciation 50.0 50.0 50.0 Less capital expenditures (50.0) (50.0) (50.0) Less additions to/plus reductions in workng capital (1.6) (1.9) (2.4) Free cash flow $212.2 $216.1 $220.0 Source: Case writers' analysis, consistent with forecast expectations of securities analysts.
Exh. 4 Page 9 2005 2006 2.2% 2.4% 26.7% 26.7% $1,372.9 $1,405.9 366.6 375.4 4.0 4.0 362.6 371.4 137.8 141.1 224.8 230.3 94.9 94.9 $129.9 $135.4 $493.0 $625.4 125.2 128.2 151.1 151.1 769.3 904.6 161.5 161.5 37.0 37.0 570.8 706.2 $769.3 $904.6 $366.6 $375.4 (139.3) (142.6) 50.0 50.0 (50.0) (50.0) (2.7) (3.0) $224.6 $229.7
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Exh. 6 Page 10 Exhibit 6 Key Industrial Financial Ratios by Rating Categories Investmen Key Industrial Financial Ratios (Three-year medians 2000–02) AAA AA 23.4 13.3 25.3 16.9 Funds from operations/total debt (%) 214.2 65.7 Free operating cash flow/total debt (%) 156.6 33.6 Return on capital (%) 35.0 26.6 Operating income/sales (%) 23.4 24.0 Long-term debt/capital (%) (1.1) 21.1 Total debt/capital, incl. short-term debt (%) 5.0 35.9 Standard & Poor's defined these ratios based on the book value of these items as follows: EBIT interest coverage = EBIT/interest expense. EBITDA interest coverage = (EBIT plus depreciation and amortization)/interest expense Long-term debt/capital = long-term debt/(long-term debt + stockholders' equity) Total debt/capital, incl. short-term debt = (short-term debt + long-term debt)/(short-term debt + long-term debt EBIT interest coverage ( x ) EBITDA interest coverage ( x ) Source of data: Standard & Poor's CreditStats .
Exh. 6 Page 11 Credit Rating nt grade Noninvestment grade A BBB BB B 6.3 3.9 2.2 1.0 8.5 5.4 3.2 1.7 42.2 30.6 19.7 10.4 22.3 12.8 7.3 1.5 18.1 13.1 11.5 8.0 18.1 15.5 15.4 14.7 33.8 40.3 53.6 72.6 42.6 47.0 57.7 75.1 + stockholders' equity)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 0.0x 10.0x 20.0x 30.0x 40.0x 50.0x 60.0x 21.0x 27.3x 20.7x 16.1x 21.9x 32.4x 32.8x 31.0x 26.3x 55.2x EBIT Divided by Interest
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Exhibit 8 Capital Costs by Rating Category AAA AA A BBB BB B 5.47% 5.50% 5.70% 6.30% 9.00% 12.00% 10.25% 10.35% 10.50% 10.60% 12.00% 14.25% Cost of debt (pretax) Cost of equity Source of data: Hudson Bancorp
Exhibit 9 Capital Market Conditons (as of July 31, 2002) U.S. Treasury Obligations Yield Other Instruments 90-day bills 1.69% Discount Notes 180-day bills 1.68% Certificates of Deposit (3-month) 2-year notes 2.23% Commercial Paper (6-month) 3-year notes 2.79% Term Fed Funds 5-year notes 3.45% 10-year notes 4.46% 30-year notes 5.30% Corporate Debt Obligations (10-year) Yield AAA 5.51% AA 5.52% A 5.70% BBB 6.33% BB 9.01% B 11.97% Source of data: Bloomberg LP, S&P's Research Insight, Value Line Investment Survey, Datastream Advance
Yield 1.70% 1.72% 1.75% 1.78%
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Exhibit 7 Deluxe Corp. EBIT Interest Coverage Ratios By Year 1992 1993 1994 1995 1996 1997 1998 EBIT 322.2 280.8 233.7 236.3 262.8 315.9 316.6 Interest expense 15.4 10.3 11.3 14.7 12.0 9.7 9.7 Coverage ratio (x) 21.0x 27.3x 20.7x 16.1x 21.9x 32.4x 32.8x
1999 2000 2001 293.8 284.7 308.2 9.5 10.8 5.6 31.0x 26.3x 55.2x
DELUXE CORP Sources of data: TICKER: DLX S&P's Research Insight, Value Line Invest SIC: 2780 GICS: 20201010 Dec92 Dec93 Dec94 Dec95 Dec96 Sales 1534.351 1581.767 1747.92 1857.981 1895.664 Cost of Sales 722.155 739.493 797.314 819.408 862.358 Gross Profit 812.1959 842.274 950.606 1038.573 1033.306 EBITDA 388.834 353.147 320.075 339.587 329.078 EBIT 322.219 280.827 233.659 236.284 262.809 Interest Expense 15.371 10.276 11.305 14.714 11.978 Total Taxes 121.999 94.052 100.02 74.885 53.302 Depreciation 66.615 72.32 86.416 103.303 66.269 Net Income 202.784 141.861 140.866 87.021 65.463 Com Shares Outstanding 83.797 82.549 82.375 82.364 82.056 Treasury Stock-# Com Shares 0 0 0 0 0 Treasury Stock-Total $ Amt 0 0 0 0 0 Earnings Per Share (Value Line) 2.42 2.09 1.71 1.15 1.65 Div. Per Share (Value Line) 1.34 1.42 1.46 1.48 1.48 Working Capital (Value Line) 330.9 386.9 224.5 130.4 12.3 PP&E-Total Net 389.017 401.641 461.818 494.158 446.858 Assets-Total 1199.556 1251.994 1256.272 1295.095 1176.44 LT Debt-Total 115.522 110.755 110.867 110.997 108.937 Preferred Stock 0 0 0 0 0 Common Equity-Total 829.808 801.249 814.393 780.374 712.916 Long-Term Debt/Total Capital 12.22028 12.14413 11.98225 12.45239 13.25505 Price-Close Fiscal Year 46.75 36.25 26.375 29 32.75 Avg. Annl. P/E (Value Line) 17.6 19 17.4 25.9 20.6 Price to Book Fiscal Yr End 4.720983 3.734671 2.667804 3.060783 3.769496 Beta Gov Bonds-20 Year 7.67 6.48 8.02 6.01 6.73 T-Bill-3 Month 3.08 3.01 5.53 4.96 5.07 S&P 500 (Datastream) 418.17 464.30 462.62 576.70 700.92 S&P 500 P/E (Datastream) 24.38 24.11 18.36 16.92 20.26
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tment Survey, Datastream Advance Dec97 Dec98 Dec99 Dec00 Dec01 1919.366 1931.796 1650.5 1262.712 1278.375 806.671 805.874 688.936 417.882 421.149 1112.695 1125.922 961.564 844.83 857.226 384.729 375.541 348.099 318.054 345.857 315.913 316.61 293.794 284.679 308.2 9.742 9.664 9.479 10.837 5.583 70.478 99.852 121.633 103.957 111.634 68.816 58.931 54.305 33.375 37.657 44.672 143.063 203.022 161.936 185.9 81.326 80.481 72.02 72.555 64.102 0 0 0 0 0 0 0 0 0 0 2.15 2.34 2.64 2.34 2.70 1.48 1.48 1.48 1.48 1.48 108.1 131 167.8 14 116.6 415.008 340.077 294.785 173.956 149.552 1148.364 1171.519 992.643 649.469 537.721 109.986 106.321 115.542 10.201 10.084 0 0 0 0 0 610.248 606.565 417.308 262.808 78.605 15.27087 14.91417 21.68378 3.736507 11.37007 34.5 36.5625 27.4375 25.27 41.58 15.4 14.3 12.7 10.2 11.01 4.597716 4.849 4.984877 6.976538 35.10112 0.90 0.90 0.85 6.02 5.39 6.83 5.59 5.74 5.22 4.37 5.17 5.73 1.71 941.64 1072.32 1281.91 1364.44 1104.61 23.88 27.45 31.43 26.29 29.50