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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  __________ to ___________

Commission file number: 1-7945
DELUXELOGO2020B.JPG

DELUXE CORPORATION
(Exact name of registrant as specified in its charter) 
MN
41-0216800
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3680 Victoria St. N.
Shoreview
MN
55126-2966
(Address of principal executive offices)
(Zip Code)

(651) 483-7111
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
DLX
NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes    ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). ☒ Yes   ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
 
 
Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ☒ No

The number of shares outstanding of registrant’s common stock as of April 30, 2020 was 41,831,715.

1


PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share par value)
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
310,146

 
$
73,620

Trade accounts receivable, net of allowance for uncollectible accounts of $3,946 and $4,985, respectively
 
158,681

 
163,421

Inventories and supplies
 
42,681

 
39,921

Funds held for customers, including assets carried at fair value of $26,282 and $34,450, respectively
 
90,938

 
117,641

Revenue in excess of billings, net of allowance for uncollectible accounts of $830 as of March 31, 2020
 
33,696

 
32,790

Other current assets
 
50,062

 
44,818

Total current assets
 
686,204

 
472,211

Deferred income taxes
 
5,817

 
3,907

Long-term investments
 
45,588

 
44,995

Property, plant and equipment, net of accumulated depreciation of $379,141 and $377,180, respectively
 
94,291

 
96,467

Operating lease assets
 
43,919

 
44,372

Intangibles, net of accumulated amortization of $555,739 and $557,023, respectively
 
240,014

 
276,122

Goodwill
 
736,688

 
804,487

Assets held for sale
 
2,762

 
2,880

Other non-current assets
 
189,253

 
197,870

Total assets
 
$
2,044,536

 
$
1,943,311

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
108,271

 
$
112,198

Funds held for customers
 
89,310

 
116,411

Accrued liabilities
 
161,120

 
179,338

Total current liabilities
 
358,701

 
407,947

Long-term debt
 
1,140,000

 
883,500

Operating lease liabilities
 
32,686

 
33,585

Deferred income taxes
 
4,960

 
14,898

Other non-current liabilities
 
34,222

 
32,520

Commitments and contingencies (Notes 12 and 15)
 


 


Shareholders' equity:
 
 

 
 

Common shares $1 par value (authorized: 500,000 shares; outstanding: March 31, 2020 – 41,691; December 31, 2019 – 42,126)
 
41,691

 
42,126

Additional paid-in capital
 

 
4,086

Retained earnings
 
492,230

 
572,596

Accumulated other comprehensive loss
 
(59,954
)
 
(47,947
)
Total shareholders’ equity
 
473,967

 
570,861

Total liabilities and shareholders’ equity
 
$
2,044,536

 
$
1,943,311


See Condensed Notes to Unaudited Consolidated Financial Statements

2


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(unaudited)
 
 
Quarter Ended March 31,
(in thousands, except per share amounts)
 
2020
 
2019
Product revenue
 
$
330,687

 
$
350,519

Service revenue
 
155,736

 
148,546

Total revenue
 
486,423

 
499,065

Cost of products
 
(121,587
)
 
(131,263
)
Cost of services
 
(80,462
)
 
(68,360
)
Total cost of revenue
 
(202,049
)
 
(199,623
)
Gross profit
 
284,374

 
299,442

Selling, general and administrative expense
 
(237,204
)
 
(230,177
)
Restructuring and integration expense
 
(17,654
)
 
(5,492
)
Asset impairment charges
 
(90,330
)
 

Operating (loss) income
 
(60,814
)

63,773

Interest expense
 
(6,999
)
 
(9,301
)
Other income
 
4,472

 
1,766

(Loss) income before income taxes
 
(63,341
)
 
56,238

Income tax benefit (provision)
 
3,210

 
(15,048
)
Net (loss) income
 
$
(60,131
)
 
$
41,190

Comprehensive (loss) income
 
$
(72,138
)
 
$
43,080

Basic (loss) earnings per share
 
(1.43
)
 
0.93

Diluted (loss) earnings per share
 
(1.45
)
 
0.93


See Condensed Notes to Unaudited Consolidated Financial Statements


3


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)

(in thousands)
 
Common shares
 
Common shares
par value
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Balance, December 31, 2019
 
42,126

 
$
42,126

 
$
4,086

 
$
572,596

 
$
(47,947
)
 
$
570,861

Net loss
 

 

 

 
(60,131
)
 

 
(60,131
)
Cash dividends ($0.30 per share)
 

 

 

 
(12,861
)
 

 
(12,861
)
Common shares issued
 
81

 
81

 
1,801

 

 

 
1,882

Common shares repurchased
 
(499
)
 
(499
)
 
(9,767
)
 
(3,734
)
 

 
(14,000
)
Other common shares retired
 
(17
)
 
(17
)
 
(779
)
 

 

 
(796
)
Employee share-based compensation
 

 

 
4,659

 

 

 
4,659

Adoption of Accounting Standards Update No. 2016-13 (Note 2)
 

 

 

 
(3,640
)
 

 
(3,640
)
Other comprehensive loss
 

 

 

 

 
(12,007
)
 
(12,007
)
Balance, March 31, 2020
 
41,691

 
$
41,691

 
$

 
$
492,230

 
$
(59,954
)
 
$
473,967


(in thousands)
 
Common shares
 
Common shares
par value
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Balance, December 31, 2018
 
44,647

 
$
44,647

 
$

 
$
927,345

 
$
(56,579
)
 
$
915,413

Net income
 

 

 

 
41,190

 

 
41,190

Cash dividends ($0.30 per share)
 

 

 

 
(13,170
)
 

 
(13,170
)
Common shares issued
 
86

 
86

 
1,862

 

 

 
1,948

Common shares repurchased
 
(1,038
)
 
(1,038
)
 
(2,478
)
 
(46,484
)
 

 
(50,000
)
Other common shares retired
 
(57
)
 
(57
)
 
(2,615
)
 

 

 
(2,672
)
Employee share-based compensation
 

 

 
3,231

 

 

 
3,231

Adoption of Accounting Standards Update No. 2016-02
 

 

 

 
(267
)
 

 
(267
)
Other comprehensive income
 

 

 

 

 
1,890

 
1,890

Balance, March 31, 2019
 
43,638

 
$
43,638

 
$

 
$
908,614

 
$
(54,689
)
 
$
897,563


See Condensed Notes to Unaudited Consolidated Financial Statements


4


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Quarter Ended March 31,
(in thousands)
 
2020
 
2019
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(60,131
)
 
$
41,190

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 

 
 

Depreciation
 
4,919

 
4,245

Amortization of intangibles
 
23,511

 
28,174

Operating lease expense
 
3,933

 
4,030

Asset impairment charges
 
90,330

 

Amortization of prepaid product discounts
 
7,077

 
5,757

Deferred income taxes
 
(9,129
)
 
1,640

Employee share-based compensation expense
 
3,618

 
3,760

Other non-cash items, net
 
8,439

 
3,137

Changes in assets and liabilities:
 
 

 
 

Trade accounts receivable
 
3,575

 
15,927

Inventories and supplies
 
(3,165
)
 
1,322

Other current assets
 
(7,403
)
 
(6,231
)
Non-current assets
 
(917
)
 
(1,557
)
Accounts payable
 
(18,059
)
 
(15,069
)
Prepaid product discount payments
 
(7,321
)
 
(9,189
)
Other accrued and non-current liabilities
 
(20,723
)
 
(31,737
)
Net cash provided by operating activities
 
18,554

 
45,399

Cash flows from investing activities:
 
 

 
 

Purchases of capital assets
 
(6,355
)
 
(14,619
)
Purchases of customer funds marketable securities
 
(34
)
 
(42
)
Proceeds from customer funds marketable securities
 
34

 
42

Other
 
354

 
(208
)
Net cash used by investing activities
 
(6,001
)
 
(14,827
)
Cash flows from financing activities:
 
 

 
 

Proceeds from issuing long-term debt
 
1,011,000

 
82,500

Payments on long-term debt
 
(754,500
)
 
(46,500
)
Net change in customer funds obligations
 
(19,407
)
 
(9,908
)
Proceeds from issuing shares under employee plans
 
1,736

 
1,548

Employee taxes paid for shares withheld
 
(757
)
 
(2,672
)
Payments for common shares repurchased
 
(14,000
)
 
(50,000
)
Cash dividends paid to shareholders
 
(12,714
)
 
(13,118
)
Other
 
(202
)
 
(1,257
)
Net cash provided (used) by financing activities
 
211,156

 
(39,407
)
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents
 
(12,717
)
 
2,076

Net change in cash, cash equivalents, restricted cash and restricted cash equivalents
 
210,992

 
(6,759
)
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year
 
174,811

 
145,259

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3)
 
$
385,803

 
$
138,500


See Condensed Notes to Unaudited Consolidated Financial Statements

5

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS

The consolidated balance sheet as of March 31, 2020, the consolidated statements of comprehensive (loss) income for the quarters ended March 31, 2020 and 2019, the consolidated statements of shareholders’ equity for the quarters ended March 31, 2020 and 2019 and the consolidated statements of cash flows for the quarters ended March 31, 2020 and 2019 are unaudited. The consolidated balance sheet as of December 31, 2019 was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (GAAP). In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial statements are included. Adjustments consist only of normal recurring items, except for any discussed in the notes below. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented in accordance with instructions for Form 10-Q and do not contain certain information included in our annual consolidated financial statements and notes. The consolidated financial statements and notes appearing in this report should be read in conjunction with the consolidated audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the 2019 Form 10-K).

The preparation of our consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, including the estimated impact of extraordinary events such as the novel coronavirus (COVID-19) pandemic, the result of which forms the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ significantly from our estimates and assumptions, including our estimates of the severity and duration of the COVID-19 pandemic. Further information can be found in Note 15.

Amounts within cash flows from operating activities and cash flows from investing activities on the consolidated statement of cash flows for the quarter ended March 31, 2019 have been modified to conform to the current year presentation. Within cash flows from operating activities, loss on sales of businesses and customer lists is included within other non-cash items, net. In the previous year, this was presented separately. Within cash flows from investing activities, payments for acquisitions, net of cash acquired, is included within the other caption. In the previous year, this was presented separately.


NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Standards

ASU No. 2016-13 – In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments. Subsequently, the FASB issued several amendments to this standard. These standards replace the incurred loss methodology previously utilized for valuing financial instruments with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected losses under the CECL methodology is applicable to financial instruments measured at amortized cost, including accounts and loans receivable. The standards also made targeted changes to the accounting for available-for-sale debt securities. We adopted the standards on January 1, 2020 using the modified retrospective method for financial instruments measured at amortized cost. Under this method, prior period amounts continue to be reported in accordance with previously applicable GAAP. We recorded a net decrease in retained earnings of $3,640 as of January 1, 2020 for the cumulative effect of adopting the standards, which consisted primarily of an increase in the allowance for credit losses on loans and notes receivable, net of the related deferred income tax impact. We recorded no allowance for credit losses related to our available-for-sale debt securities. Further information regarding these investments can be found in Note 3.

An allowance for uncollectible accounts is a valuation account that is deducted from an asset's amortized cost basis to present the net amount expected to be collected. Amounts are charged off against the allowance when we believe the uncollectibility of an account is confirmed. In calculating the allowances related to trade accounts receivable and revenue in excess of billings, we utilize a combination of aging schedules with reserve rates applied to both current and aged receivables and roll-rate reserves using historical loss rates and changes in current or projected conditions. In determining the allowance for uncollectible accounts related to loans and notes receivable from distributors, we utilize a loss-rate analysis based on historical loss information, current delinquency rates, the credit quality of the loan recipients and the portfolio mix to determine an appropriate credit risk measurement, adjusted to reflect current loan-specific risk characteristics and changes in environmental conditions affecting our small business distributors. Changes in conditions that may affect our distributors include, but are not limited to, general economic conditions, changes in the markets for their products and services and changes in governmental regulations. In completing our analysis, we utilize a reversion methodology for periods beyond the reasonable and supportable forecast period, as many of our loans and notes receivable have longer terms. Further information regarding current risks and

6

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

uncertainties affecting our loans and notes receivable can be found in Note 15. Further information regarding our allowances for uncollectible accounts can be found in Note 3.

Our trade accounts receivable and unbilled receivables are not interest-bearing. Interest rates on our loans and notes receivable generally range from 6% to 8% and reflect market interest rates at the time the transactions were executed. Accrued interest included in loans and notes receivable is not significant.
 
ASU No. 2018-13 – In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements. This standard removes, modifies and adds certain disclosures related to recurring and nonrecurring fair value measurements. During 2018, we adopted the provisions of the standard that remove and modify disclosure requirements. The additional disclosures were effective for us on January 1, 2020 and are required to be applied prospectively to fair value measurements completed on or after that date. Disclosures regarding our fair value measurements can be found in Note 7.

ASU No. 2018-15 – In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the new standard. We adopted this standard on January 1, 2020, applying it prospectively to eligible costs incurred on or after this date. Adoption of this standard did impact our results of operations and financial position, as we previously expensed these implementation costs as incurred. As of March 31, 2020, $7,507 of cloud computing implementation costs were included within other non-current assets on the consolidated balance sheet. These costs primarily relate to our planned implementation of a new enterprise resource planning system.

Accounting Standards Not Yet Adopted

ASU No. 2019-12 – In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This standard addresses several specific areas of accounting for income taxes. The guidance is effective for us on January 1, 2021. Portions of the standard are required to be adopted prospectively and certain aspects will be adopted using the modified retrospective approach. We do not expect the application of this standard to have a significant impact on our results of operations or financial position.


NOTE 3: SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Trade accounts receivable Changes in the allowance for uncollectible accounts included within trade accounts receivable for the quarters ended March 31, 2020 and 2019 were as follows:
 
 
Quarter Ended March 31,
(in thousands)
 
2020
 
2019
Balance, beginning of year
 
$
4,985

 
$
3,639

Bad debt expense
 
1,059

 
1,248

Write-offs and other
 
(2,098
)
 
(423
)
Balance, end of period
 
$
3,946

 
$
4,464



Inventories and supplies – Inventories and supplies were comprised of the following:
(in thousands)
 
March 31,
2020
 
December 31,
2019
Raw materials
 
$
7,355

 
$
6,977

Semi-finished goods
 
7,532

 
7,368

Finished goods
 
24,091

 
21,982

Supplies
 
3,703

 
3,594

Inventories and supplies
 
$
42,681

 
$
39,921




7

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

Available-for-sale debt securities – Available-for-sale debt securities included within funds held for customers were comprised of the following:
 
 
March 31, 2020
(in thousands)
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Funds held for customers:(1)
 
 
 
 
 
 
 
 
Domestic money market fund
 
$
11,000

 
$

 
$

 
$
11,000

Canadian and provincial government securities
 
8,302

 

 
(38
)
 
8,264

Canadian guaranteed investment certificates
 
7,017

 

 

 
7,017

Available-for-sale debt securities
 
$
26,319

 
$

 
$
(38
)
 
$
26,281


(1) Funds held for customers, as reported on the consolidated balance sheet as of March 31, 2020, also included cash of $64,657.

 
 
December 31, 2019
(in thousands)
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Funds held for customers:(1)
 
 
 
 
 
 
 
 
Domestic money market fund
 
$
18,000

 
$

 
$

 
$
18,000

Canadian and provincial government securities
 
9,056

 

 
(304
)
 
8,752

Canadian guaranteed investment certificates
 
7,698

 

 

 
7,698

Available-for-sale debt securities
 
$
34,754

 
$

 
$
(304
)
 
$
34,450

 
(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2019, also included cash of $83,191.
 
Expected maturities of available-for-sale debt securities as of March 31, 2020 were as follows:
(in thousands)
 
Fair value
Due in one year or less
 
$
20,323

Due in two to five years
 
2,884

Due in six to ten years
 
3,075

Available-for-sale debt securities
 
$
26,282



Further information regarding the fair value of available-for-sale debt securities can be found in Note 7.

Revenue in excess of billings – Revenue in excess of billings was comprised of the following:
(in thousands)
 
March 31,
2020
 
December 31,
2019
Conditional right to receive consideration
 
$
26,971

 
$
24,499

Unconditional right to receive consideration
 
6,725

 
8,291

Revenue in excess of billings
 
$
33,696

 
$
32,790




8

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

Upon adoption of ASU No. 2016-13 and related amendments on January 1, 2020 (Note 2), we recorded an allowance for uncollectible accounts related to revenue in excess of billings. Changes in this allowance for the quarter ended March 31, 2020 were as follows:
(in thousands)
 
Quarter Ended
March 31, 2020
Balance, beginning of year
 
$

Adoption of ASU No. 2016-13 (Note 2)
 
808

Bad debt expense
 
22

Balance, end of period
 
$
830



Assets held for sale – Assets held for sale as of December 31, 2019 consisted of a small business customer list and certain Cloud Solutions internal-use software. The small business customer list was also held for sale as of March 31, 2020. During the first quarter of 2020, we determined that the internal-use software was fully impaired, and we recorded an asset impairment charge of $1,530. Customer attrition in the business utilizing the software caused us to evaluate the asset for impairment, and this analysis indicated that the asset was fully impaired.

Also held for sale as of March 31, 2020, was an additional small business customer list. During the first quarter of 2020, we agreed to sales terms for this customer list, and we completed the sale early in the second quarter of 2020. Based on the negotiated sales price, we recorded an asset impairment charge of $697 to write-down the asset's carrying value to its fair value less costs to sell. We are actively marketing the remaining asset held for sale and expect that its selling price will equal or exceed its current carrying value.

Intangibles – Intangibles were comprised of the following:
 
 
March 31, 2020
 
December 31, 2019
(in thousands)
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
Amortizable intangibles:
 
 

 
 

 
 

 
 

 
 

 
 

Internal-use software
 
$
387,356

 
$
(312,444
)
 
$
74,912

 
$
380,905

 
$
(299,698
)
 
$
81,207

Customer lists/relationships
 
307,372

 
(170,776
)
 
136,596

 
348,055

 
(187,462
)
 
160,593

Software to be sold
 
36,900

 
(20,714
)
 
16,186

 
36,900

 
(19,657
)
 
17,243

Technology-based intangibles
 
34,613

 
(23,763
)
 
10,850

 
34,780

 
(22,122
)
 
12,658

Trade names
 
29,512

 
(28,042
)
 
1,470

 
32,505

 
(28,084
)
 
4,421

Intangibles
 
$
795,753

 
$
(555,739
)

$
240,014


$
833,145


$
(557,023
)

$
276,122



During the quarter ended March 31, 2020, we recorded asset impairment charges related to certain intangible assets. Further information can be found in Note 7.

Amortization of intangibles was $23,511 for the quarter ended March 31, 2020 and $28,174 for the quarter ended March 31, 2019. During the quarter ended March 31, 2020, we acquired internal-use software of $10,146, with a weighted-average amortization period of 3 years.

Based on the intangibles in service as of March 31, 2020, estimated future amortization expense is as follows:
(in thousands)
 
Estimated
amortization
expense
Remainder of 2020
 
$
65,994

2021
 
74,042

2022
 
50,325

2023
 
31,879

2024
 
15,013



9

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Goodwill – Changes in goodwill by reportable segment and in total for the quarter ended March 31, 2020 were as follows :
(in thousands)
 
Payments
 
Cloud Solutions
 
Promotional Solutions
 
Checks
 
Total
Balance, December 31, 2019:
 
 
 
 
 
 
 
 
 
 
Goodwill, gross
 
$
168,165

 
$
432,984

 
$
252,834

 
$
434,812

 
$
1,288,795

Accumulated impairment charges
 

 
(357,741
)
 
(126,567
)
 

 
(484,308
)
Goodwill, net of accumulated impairment charges
 
168,165

 
75,243


126,267

 
434,812


804,487

Impairment charges (Note 7)
 

 
(4,317
)
 
(63,356
)
 

 
(67,673
)
Currency translation adjustment
 

 

 
(126
)
 

 
(126
)
Balance, March 31, 2020
 
$
168,165

 
$
70,926

 
$
62,785

 
$
434,812

 
$
736,688

 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2020:
 
 

 
 

 
 

 
 
 
 

Goodwill, gross
 
$
168,165

 
$
432,984

 
$
252,708

 
$
434,812

 
$
1,288,669

Accumulated impairment charges
 

 
(362,058
)
 
(189,923
)
 

 
(551,981
)
Goodwill, net of accumulated impairment charges
 
$
168,165

 
$
70,926


$
62,785

 
$
434,812


$
736,688


Other non-current assets – Other non-current assets were comprised of the following:
(in thousands)
 
March 31,
2020
 
December 31,
2019
Postretirement benefit plan asset
 
$
58,130

 
$
56,743

Loans and notes receivable from Safeguard distributors, net of allowance for doubtful accounts(1)
 
55,861

 
66,872

Prepaid product discounts
 
45,994

 
51,145

Deferred sales commissions(2)
 
9,530

 
9,682

Other
 
19,738

 
13,428

Other non-current assets
 
$
189,253

 
$
197,870



(1) Amount Includes the non-current portion of loans and note receivablles. The current portion of these receivables is included in other current assets on the consolidated balance sheets and was $3,366 as of March 31, 2020 and $3,511 as of December 31, 2019.

(2) Amortization of deferred sales commissions was $882 for the quarter ended March 31, 2020 and $697 for the quarter ended March 31, 2019.

Upon adoption of ASU No. 2016-13 and related amendments on January 1, 2020 (Note 2), we recorded an additional allowance for uncollectible accounts related to loans and notes receivable from Safeguard distributors. Changes in this allowance for the quarters ended March 31, 2020 and 2019 were as follows:
 
 
Quarter Ended March 31,
(in thousands)
 
2020
 
2019
Balance, beginning of year
 
$
284

 
$
284

Adoption of ASU No. 2016-13 (Note 2)
 
4,749

 

Bad debt expense
 
5,382

 

Balance, end of period
 
$
10,415

 
$
284



10

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


During the quarter ended March 31, 2020, we recorded a loan-specific allowance related to a distributor that was underperforming. In calculating this reserve, we utilized various valuation techniques to determine the value of the underlying collateral, resulting in an allowance of $6,128 as of March 31, 2020. Other past due receivables and those on non-accrual status were not significant as of March 31, 2020.

We categorize loans and notes receivable into risk categories based on information about the ability of borrowers to service their debt, including current financial information, historical payment experience, current economic trends and other factors. The highest quality receivables are assigned a 1-2 internal grade. Those that have a potential weakness requiring management's attention are assigned a 3-4 internal grade.

The following table presents loans and notes receivable from Safeguard distributors, including the current portion, by credit quality indicator and by year of origination, as of March 31, 2020. There were no write-offs or recoveries recorded during the quarter ended March 31, 2020.
 
 
Loans and notes receivable from distributors amortized cost basis by origination year
 
 
(in thousands)
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Total
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
1-2 internal grade
 
$
6,313

 
$
24,352

 
$
22,690

 
$
213

 
$
4,644

 
$
58,212

3-4 internal grade
 

 
7,673

 

 

 
3,757

 
11,430

Loans and notes receivable
 
$
6,313

 
$
32,025

 
$
22,690

 
$
213

 
$
8,401

 
$
69,642



Changes in prepaid product discounts during the quarters ended March 31, 2020 and 2019 were as follows:
 
 
Quarter Ended March 31,
(in thousands)
 
2020
 
2019
Balance, beginning of year
 
$
51,145

 
$
54,642

Additions(1)
 
2,470

 
9,553

Amortization
 
(7,077
)
 
(5,757
)
Other
 
(544
)
 
(201
)
Balance, end of period
 
$
45,994

 
$
58,237

 
(1) Prepaid product discounts are generally accrued upon contract execution. Cash payments for prepaid product discounts were $7,321 for the quarter ended March 31, 2020 and $9,189 for the quarter ended March 31, 2019.

Accrued liabilities – Accrued liabilities were comprised of the following:
(in thousands)
 
March 31,
2020
 
December 31,
2019
Deferred revenue(1)
 
$
46,401

 
$
46,098

Employee cash bonuses
 
13,818

 
36,918

Operating lease liabilities
 
12,924

 
12,898

Prepaid product discounts due within one year
 
11,772

 
14,709

Customer rebates
 
7,857

 
8,944

Other
 
68,348

 
59,771

Accrued liabilities
 
$
161,120

 
$
179,338


 
(1) $20,672 of the December 31, 2019 amount was recognized as revenue during the quarter ended March 31, 2020.


11

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

Supplemental cash flow information – The reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents to the consolidated balance sheets was as follows:
(in thousands)
 
March 31,
2020
 
March 31,
2019
Cash and cash equivalents
 
$
310,146

 
$
61,529

Restricted cash and restricted cash equivalents included in funds held for customers
 
75,657

 
76,971

Total cash, cash equivalents, restricted cash and restricted cash equivalents
 
$
385,803

 
$
138,500



 
NOTE 4: (LOSS) EARNINGS PER SHARE

The following table reflects the calculation of basic and diluted (loss) earnings per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted (loss) earnings per share because their effect would have been antidilutive. 
 
 
Quarter Ended March 31,
(in thousands, except per share amounts)
 
2020
 
2019
(Loss) earnings per share – basic:
 
 
 
 
Net (loss) income
 
$
(60,131
)
 
$
41,190

Income allocated to participating securities
 
(21
)
 
(110
)
(Loss) income available to common shareholders
 
$
(60,152
)
 
$
41,080

Weighted-average shares outstanding
 
42,028

 
43,965

(Loss) earnings per share – basic
 
$
(1.43
)
 
$
0.93

 
 
 
 
 
(Loss) earnings per share – diluted:
 
 

 
 

Net (loss) income
 
$
(60,131
)
 
$
41,190

Income allocated to participating securities
 
(21
)
 
(65
)
Re-measurement of share-based awards classified as liabilities
 
(775
)
 

(Loss) income available to common shareholders
 
$
(60,927
)
 
$
41,125

Weighted-average shares outstanding
 
42,028

 
43,965

Dilutive impact of potential common shares
 
37

 
100

Weighted-average shares and potential common shares outstanding
 
42,065

 
44,065

(Loss) earnings per share – diluted
 
$
(1.45
)
 
$
0.93

Antidilutive options excluded from calculation
 
2,214

 
1,097





12

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

NOTE 5: OTHER COMPREHENSIVE (LOSS) INCOME

Reclassification adjustments Information regarding amounts reclassified from accumulated other comprehensive loss to net (loss) income was as follows:
Accumulated other comprehensive loss components
 
Amounts reclassified from accumulated other comprehensive loss
 
Affected line item in consolidated statements of comprehensive (loss) income
 
 
Quarter Ended
March 31,
 
 
(in thousands)
 
2020
 
2019
 
 
Realized gain on interest rate swap
 
$
93

 
$

 
Interest expense
Tax expense
 
(24
)
 

 
Income tax benefit (provision)
Realized gain on interest rate swap, net of tax
 
69

 

 
Net income
Amortization of postretirement benefit plan items:
 
 
 
 
 
 
Prior service credit
 
355

 
355

 
Other income
Net actuarial loss
 
(575
)
 
(806
)
 
Other income
Total amortization
 
(220
)
 
(451
)
 
Other income
Tax benefit
 
12

 
70

 
Income tax benefit (provision)
Amortization of postretirement benefit plan items, net of tax
 
(208
)
 
(381
)
 
Net income
Total reclassifications, net of tax
 
$
(139
)
 
$
(381
)
 
 


Accumulated other comprehensive loss Changes in the components of accumulated other comprehensive loss during the quarter ended March 31, 2020 were as follows:
(in thousands)
 
Postretirement benefit plans
 
Net unrealized loss on available-for-sale debt securities(1)
 
Net unrealized loss on cash flow hedge(2)
 
Currency translation adjustment
 
Accumulated other comprehensive loss
Balance, December 31, 2019
 
$
(28,406
)
 
$
(275
)
 
$
(1,097
)
 
$
(18,169
)
 
$
(47,947
)
Other comprehensive income (loss) before reclassifications
 

 
189

 
(4,980
)
 
(7,355
)
 
(12,146
)
Amounts reclassified from accumulated other comprehensive loss
 
208

 

 
(69
)
 

 
139

Net current-period other comprehensive income (loss)
 
208

 
189

 
(5,049
)
 
(7,355
)
 
(12,007
)
Balance, March 31, 2020
 
$
(28,198
)
 
$
(86
)
 
$
(6,146
)
 
$
(25,524
)
 
$
(59,954
)


(1) Other comprehensive income before reclassifications is net of income tax expense of $66.

(2) Other comprehensive loss before reclassifications is net of an income tax benefit of $1,736.


NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS

As part of our interest rate risk management strategy, in July 2019, we entered into an interest rate swap, which we designated as a cash flow hedge, to mitigate variability in interest payments on a portion of the amount drawn under our revolving credit facility (Note 11). The interest rate swap, which terminates in March 2023 when our revolving credit facility matures, effectively converts $200,000 of variable rate debt to a fixed rate of 1.798%. Changes in the fair value of the interest

13

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

rate swap are recorded in accumulated other comprehensive loss on the consolidated balance sheets and are subsequently reclassified to interest expense as interest payments are made on the variable-rate debt. The fair value of the interest rate swap was $8,289 as of March 31, 2020 and $1,480 as of December 31, 2019 and was included in other non-current liabilities on the consolidated balance sheets. The fair value of this derivative is calculated based on the prevailing LIBOR rate curve on the date of measurement. The cash flow hedge was fully effective as of March 31, 2020 and December 31, 2019 and its impact on consolidated net (loss) income and our consolidated statements of cash flows was not significant. We also do not expect the amount to be reclassified to interest expense over the next 12 months to be significant.


NOTE 7: FAIR VALUE MEASUREMENTS

Goodwill impairment analyses We evaluate the carrying value of goodwill as of July 31 of each year and between annual evaluations if events occur or circumstances change that would indicate a possible impairment. Our policy on impairment of goodwill and indefinite-lived intangibles is included under the caption "Note 1: Significant Accounting Policies" in the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K and explains our methodology for assessing impairment of these assets.

Effective January 1, 2020, we reorganized our reportable business segments to align with structural and management reporting changes in support of our growth strategy (Note 14). As a result, we reassessed our previously determined reporting units and concluded that a realignment of our reporting units was required. We analyzed goodwill for impairment immediately prior to this realignment by performing a qualitative analysis for all of our reporting units, with the exception of our Direct-to-Consumer reporting unit, which is part of our new Checks reportable business segment. The qualitative analyses evaluated factors, including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the last quantitative analyses we completed. In completing these assessments, we noted no changes in events or circumstances that indicated that it was more likely than not that the fair value of any reporting unit was less than its carrying amount. The quantitative analysis of our Direct-to-Consumer reporting unit indicated that its fair value exceeded its carrying value by approximately $35,000, or 26% above its carrying value.

In completing the realignment of our reporting units, we reallocated the carrying value of goodwill to our new reporting units based on their relative fair values. Immediately subsequent to the realignment, we completed a quantitative analysis for the reporting units that changed as a result of the realignment. This quantitative analysis, as of January 1, 2020, indicated that the estimated fair values of our reporting units exceeded their carrying values by approximate amounts between $37,000 and $954,000, or by amounts between 121% and 189% above the carrying values of their net assets.

On January 30, 2020, the World Health Organization (WHO) announced a global health emergency due to an outbreak of COVID-19 originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. Following the pandemic designation, we observed a decline in the market valuation of our common shares and we determined that the global response to the outbreak negatively impacted our estimates of expected future cash flows. After our consideration of economic, market and industry conditions, cost factors, the overall financial performance of the reporting units and the last quantitative analyses we completed, we concluded that a triggering event had occurred for 2 of our reporting units. As such, we completed quantitative goodwill impairment analyses for our Promotional Solutions and Cloud Solutions Web Hosting reporting units as of March 31, 2020. Our analyses indicated that the goodwill of our Promotional Solutions reporting unit was partially impaired and the goodwill of our Cloud Solutions Web Hosting reporting unit was fully impaired. As such, we recorded goodwill impairment charges of $63,356 and $4,317, respectively. The impairment charges were measured as the amount by which the reporting units' carrying values exceeded their estimated fair values, limited to the carrying amount of goodwill. After the impairment charges, $62,785 of goodwill remained in the Promotional Solutions reporting unit.

Other nonrecurring asset impairment analyses As a result of the impacts of the COVID-19 outbreak, we assessed for impairment certain long-lived assets of our Cloud Solutions Web Hosting reporting unit as of March 31, 2020. As a result of these assessments, we recorded asset impairment charges of $17,678 related to certain customer list, software and trade name intangible assets. With the exception of certain internal-use software assets, we determined that the assets were fully impaired. We utilized the discounted value of estimated future cash flows to estimate the fair value of the asset group. In our analysis, we assumed a revenue decline of 31% and a gross margin decline of 5.2 points in 2020, as well as a discount rate of 9%.

During the first quarter of 2020, we assessed for impairment the carrying value of an asset group related to a small business distributor that we previously purchased. Our assessment was the result of customer attrition during the quarter that impacted our projections of future cash flows. Based on our estimate of discounted future cash flows, we determined that the asset group was partially impaired as of February 29, 2020, and we recorded an asset impairment charge of $2,752, reducing the carrying value of the related customer list intangible asset. In calculating the estimated fair value of the asset group, we assumed no revenue growth, a 1.9 point improvement in gross margin and a discount rate of 11%. Also during the first quarter of

14

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

2020, we recorded asset impairment charges of $2,227 related to assets held for sale. Further information regarding these impairment charges can be found in Note 3.

Asset impairment analyses completed during the quarter ended March 31, 2020 were as follows:
 
 
 
 
Fair value measurements using
 
 
 
 
Fair value as of measurement date
 
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
 
Impairment charge
(in thousands)
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Customer lists
 
$

 
$

 
$

 
$

 
$
8,397

Internal-use software
 
2,172

 

 

 
2,172

 
6,932

Small business distributor
 
7,622

 

 

 
7,622

 
2,752

Assets held for sale
 
1,412

 

 

 
1,412

 
2,227

Trade names
 

 

 

 

 
2,182

Technology-based intangibles
 

 

 

 

 
167

Goodwill
 
 
 
 
 
 
 
 
 
67,673

Total
 
 
 
 
 
 
 
 
 
$
90,330



Recurring fair value measurements Funds held for customers included cash equivalents and available-for-sale debt securities (Note 3). The cash equivalents consisted of a money market fund investment that is traded in an active market. Because of the short-term nature of the underlying investments, the cost of this investment approximates its fair value. Available-for-sale debt securities consisted of a mutual fund investment that invests in Canadian and provincial government securities, as well as investments in Canadian guaranteed investment certificates (GICs) with maturities of 1 year or less. The mutual fund is not traded in an active market and its fair value is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. The fair value of the GICs approximated cost due to their relatively short duration. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss on the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue on the consolidated statements of comprehensive (loss) income and were not significant for the quarters ended March 31, 2020 and 2019.


15

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

Information regarding the fair values of our financial instruments was as follows:
 
 
 
 
 
 
Fair value measurements using
 
 
 
 
March 31, 2020
 
Quoted prices in active markets for identical assets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
(in thousands)
 
Balance sheet location
 
Carrying value
 
Fair value
 
 
 
Measured at fair value through comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
Funds held for customers
 
$
11,000

 
$
11,000

 
$
11,000

 
$

 
$

Available-for-sale debt securities
 
Funds held for customers
 
15,281

 
15,281

 

 
15,281

 

Derivative liability (Note 6)
 
Other non-current liabilities
 
(8,289
)
 
(8,289
)
 

 
(8,289
)
 

Amortized cost:
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
Cash and cash equivalents
 
310,146

 
310,146

 
310,146

 

 

Cash
 
Funds held for customers
 
64,657

 
64,657

 
64,657

 

 

Loans and notes receivable from Safeguard distributors
 
Other current and non-current assets
 
59,227

 
60,572

 

 

 
60,572

Long-term debt
 
Long-term debt
 
1,140,000

 
1,140,000

 

 
1,140,000

 



 
 
 
 
 
 
Fair value measurements using
 
 
 
 
December 31, 2019
 
Quoted prices in active markets for identical assets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
(in thousands)
 
Balance sheet location
 
Carrying value
 
Fair value
 
 
 
Measured at fair value through comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
Funds held for customers
 
$
18,000

 
$
18,000

 
$
18,000

 
$

 
$

Available-for-sale debt securities
 
Funds held for customers
 
16,450

 
16,450

 

 
16,450

 

Derivative liability (Note 6)
 
Other non-current liabilities
 
(1,480
)
 
(1,480
)
 

 
(1,480
)
 

Amortized cost:
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
Cash and cash equivalents
 
73,620

 
73,620

 
73,620

 

 

Cash
 
Funds held for customers
 
83,191

 
83,191

 
83,191

 

 

Loans and notes receivable from Safeguard distributors
 
Other current and non-current assets
 
70,383

 
68,887

 

 

 
68,887

Long-term debt
 
Long-term debt
 
883,500

 
883,500

 

 
883,500

 





16

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

NOTE 8: RESTRUCTURING AND INTEGRATION EXPENSE

Restructuring and integration expense consists of costs related to the consolidation and migration of certain applications and processes, including our financial, sales and human resources management systems. It also includes costs related to the integration of acquired businesses into our systems and processes. These costs consist primarily of information technology consulting, project management services and internal labor, as well as other miscellaneous costs associated with our initiatives, such as training, travel and relocation. In addition, we recorded employee severance costs related to these initiatives, as well as our ongoing cost reduction initiatives, across functional areas. Our restructuring and integration activities have increased, as we are currently pursuing several initiatives designed to focus our business behind our growth strategies and to increase our efficiency. Restructuring and integration expense is not allocated to our reportable business segments.

Restructuring and integration expense is reflected on the consolidated statements of comprehensive (loss) income as follows:
 
 
Quarter Ended
March 31,
(in thousands)
 
2020
 
2019
Total cost of revenue
 
$
829

 
$
791

Operating expenses
 
17,654

 
5,492

Restructuring and integration expense
 
$
18,483

 
$
6,283



Restructuring and integration expense for each period was comprised of the following:
 
 
Quarter Ended
March 31,
(in thousands)
 
2020
 
2019
External consulting fees
 
$
10,901

 
$
2,146

Employee severance benefits
 
5,083

 
2,064

Internal labor
 
1,853

 
2,061

Other
 
646

 
12

Restructuring and integration expense
 
$
18,483

 
$
6,283



Our restructuring and integration accruals represent expected cash payments required to satisfy the remaining severance obligations to those employees already terminated and those expected to be terminated under our various initiatives. These accruals are included in accrued liabilities on the consolidated balance sheets. The majority of the related employee reductions are expected to be completed in the second quarter of 2020, and we expect most of the related severance payments to be paid by the third quarter of 2020, utilizing cash from operations.

Changes in our restructuring and integration accruals were as follows:
(in thousands)
 
Employee severance benefits
Balance, December 31, 2019
 
$
3,459

Charges
 
5,318

Reversals
 
(235
)
Payments
 
(2,703
)
Balance, March 31, 2020
 
$
5,839



The charges and reversals presented in the rollforward of our restructuring and integration accruals do not include items charged directly to expense as incurred, as those items are not reflected in accrued liabilities on the consolidated balance sheets.



17

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

NOTE 9: INCOME TAX PROVISION

The effective tax rate on pretax (loss) income reconciles to the U.S. federal statutory tax rate as follows:
 
 
Quarter Ended March 31, 2020
 
Year Ended December 31, 2019
Income tax at federal statutory rate
 
21.0
%
 
21.0
%
Goodwill impairment charges
 
(18.8
%)
 
(29.3
%)
Change in valuation allowances
 

 
(4.5
%)
Net tax impact of share-based compensation
 
(0.9
%)
 
(1.1
%)
Foreign tax rate differences
 
3.9
%
 
1.3
%
State income tax expense, net of federal income tax benefit
 
2.2
%
 
4.9
%
Other
 
(2.3
%)
 

Effective tax rate
 
5.1
%
 
(7.7
%)



NOTE 10: POSTRETIREMENT BENEFITS

We have historically provided certain health care benefits for a large number of retired U.S. employees. In addition to our retiree health care plan, we also have a U.S. supplemental executive retirement plan. Further information regarding our postretirement benefit plans can be found under the caption “Note 14: Postretirement Benefits” in the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.

Postretirement benefit income is included in other income on the consolidated statements of comprehensive (loss) income and consisted of the following components:
 
 
Quarter Ended
March 31,
(in thousands)
 
2020
 
2019
Interest cost
 
$
478

 
$
682

Expected return on plan assets
 
(1,905
)
 
(1,740
)
Amortization of prior service credit
 
(355
)
 
(355
)
Amortization of net actuarial losses
 
575

 
806

Net periodic benefit income
 
$
(1,207
)
 
$
(607
)


NOTE 11: DEBT

Debt outstanding consisted of amounts drawn on our revolving credit facility of $1,140,000 as of March 31, 2020 and $883,500 as of December 31, 2019. In March 2020, in conjunction with our response to the COVID-19 outbreak, we drew an additional $238,000 on our credit facility given the uncertainty in how the commercial capital and credit markets would operate during the pandemic. As of March 31, 2020, we held cash and cash equivalents of $310,146.

As of March 31, 2020, the total availability under our revolving credit facility was $1,150,000. The facility includes an accordion feature allowing us, subject to lender consent, to increase the credit commitment to an aggregate amount not exceeding $1,425,000. The credit facility matures in March 2023. Our quarterly commitment fee ranges from 0.175% to 0.35%, based on our leverage ratio. Amounts drawn under the credit facility had a weighted-average interest rate of 3.01% as of March 31, 2020 and 3.03% as of December 31, 2019. In July 2019, we executed an interest rate swap to convert $200,000 of the amount drawn under the credit facility to fixed rate debt. Further information can be found in Note 6.


18

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

Borrowings under the credit agreement are collateralized by substantially all of our personal and intangible property. The credit agreement governing our credit facility contains customary covenants regarding limits on levels of subsidiary indebtedness and capital expenditures, liens, investments, acquisitions, certain mergers, certain asset sales outside the ordinary course of business, and change in control as defined in the agreement. The agreement also requires us to maintain certain financial ratios, including a maximum leverage ratio of 3.5 and a minimum ratio of consolidated earnings before interest and taxes to consolidated interest expense, as defined in the credit agreement, of 3.0. Additionally, the agreement contains customary representations and warranties including, as a condition to borrowing, that all such representations and warranties are true and correct in all material respects on the date of the borrowing, including representations as to no material adverse change in our business, assets, operations or financial condition.

There are currently no limitations on the amount of dividends and share repurchases under the terms of our credit agreement. However, if our leverage ratio, defined as total debt less unrestricted cash to EBITDA, should exceed 2.75 to 1, there would be an annual limitation on the amount of dividends and share repurchases.

Daily average amounts outstanding under our credit facility were as follows:
(in thousands)
 
Quarter Ended March 31, 2020
 
Year Ended
December 31, 2019
Daily average amount outstanding
 
$
923,423

 
$
925,715

Weighted-average interest rate
 
2.83
%
 
3.54
%


As of March 31, 2020, amounts were available for borrowing under our revolving credit facility as follows:
(in thousands)
 
Total
available
Revolving credit facility commitment
 
$
1,150,000

Amount drawn on revolving credit facility
 
(1,140,000
)
Outstanding letters of credit(1)
 
(5,428
)
Net available for borrowing as of March 31, 2020
 
$
4,572



(1) We use standby letters of credit to collateralize certain obligations related primarily to our self-insured workers’ compensation claims, as well as claims for environmental matters, as required by certain states. These letters of credit reduce the amount available for borrowing under our revolving credit facility.


NOTE 12: OTHER COMMITMENTS AND CONTINGENCIES

Indemnifications – In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. These indemnification provisions generally encompass third-party claims arising from our products and services, including, without limitation, service failures, breach of security, intellectual property rights, governmental regulations and/or employment-related matters. Performance under these indemnities would generally be triggered by our breach of the terms of the contract. In disposing of assets or businesses, we often provide representations, warranties and/or indemnities to cover various risks, including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal matters related to periods prior to disposition. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we do not believe that any liability under these indemnities would have a material adverse effect on our financial position, annual results of operations or annual cash flows. We have recorded liabilities for known indemnifications related to environmental matters. These liabilities were not significant as of March 31, 2020 or December 31, 2019.

Self-insurance – We are self-insured for certain costs, primarily workers' compensation claims and medical and dental benefits for active employees and those employees on long-term disability. The liabilities associated with these items represent our best estimate of the ultimate obligations for reported claims plus those incurred, but not reported, and totaled $7,265 as of March 31, 2020 and $7,576 as of December 31, 2019. These accruals are included in accrued liabilities and other non-current liabilities on the consolidated balance sheets. Our workers' compensation liability is recorded at present value. The difference between the discounted and undiscounted liability was not significant as of March 31, 2020 or December 31, 2019.

Our self-insurance liabilities are estimated, in part, by considering historical claims experience, demographic factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future events and claims differ from these assumptions and historical trends.

19

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Litigation – Recorded liabilities for legal matters, as well as related charges recorded in each period, were not material to our financial position, results of operations or liquidity during the periods presented, and we do not believe that any of the currently identified claims or litigation will materially affect our financial position, results of operations or liquidity, upon resolution. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on our financial position, results of operations or liquidity in the period in which the ruling occurs or in future periods.


Note 13: SHAREHOLDERS' EQUITY

In October 2018, our board of directors authorized the repurchase of up to $500,000 of our common stock. This authorization has no expiration date. During the quarter ended March 31, 2020, we repurchased 499 thousand shares for $14,000. As of March 31, 2020, $287,452 remained available for repurchase under the authorization.



NOTE 14: BUSINESS SEGMENT INFORMATION

For several years, we operated 3 reportable business segments: Small Business Services, Financial Services and Direct Checks. These segments were generally organized by customer type and reflected the way we managed the company. Effective January 1, 2020, we reorganized our reportable business segments to align with structural and management reporting changes in support of our growth strategy. We now operate 4 reportable segments, as follows:

Payments – This segment includes our treasury management solutions, including remittance and lockbox processing, remote deposit capture, receivables management, payment processing and paperless treasury management, in addition to payroll and disbursement services, including Deluxe Payment Exchange and fraud and security services.

Cloud Solutions – This segment includes web hosting and design services, data-driven marketing solutions and hosted solutions, including digital engagement, logo design, financial institution profitability reporting, account switching tools and business incorporation services.

Promotional Solutions – This segment includes business forms, accessories, advertising specialties, promotional apparel, retail packaging and strategic sourcing services.

Checks – This segment includes printed personal and business checks.

The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in the 2019 Form 10-K. We allocate corporate costs for our shared services functions to our business segments when the costs are directly attributable to a segment. This includes certain sales and marketing, human resources, supply chain, real estate, finance, information technology and legal costs. Costs that are not directly attributable to a business segment are reported as Corporate operations and consist primarily of marketing, accounting, information technology, facilities, executive management and legal, tax and treasury costs that support the corporate function. Corporate operations also includes other income. All of our segments operate primarily in the United States, with some operations in Canada. In addition, Cloud Solutions has operations in Australia and portions of Europe, as well as partners in Central and South America.

Under the new segment structure, our chief operating decision maker (i.e., our Chief Executive Officer) reviews earnings before interest, taxes, depreciation and amortization (EBITDA) on an adjusted basis for each segment when deciding how to allocate resources and to assess segment operating performance. Adjusted EBITDA for each segment excludes depreciation and amortization expense, interest expense, income tax expense and certain other amounts, which may include, from time to time: asset impairment charges; restructuring, integration and other costs; CEO transition costs; share-based compensation expense; acquisition transaction costs; certain legal-related expense; and gains or losses on sales of businesses and customer lists. Our Chief Executive Officer does not review segment asset information when making investment or operating decisions regarding our reportable business segments.


20

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

The following is our segment information for the quarters ended March 31, 2020 and 2019. The segment information for 2019 has been revised to reflect our current segment structure.
 
 
Quarter Ended March 31,
(in thousands)
 
2020
 
2019
Payments:
 
 
 
 
Revenue
 
$
77,040

 
$
65,150

Adjusted EBITDA
 
18,023

 
16,867

Cloud Solutions:
 
 
 
 
Revenue
 
75,945

 
78,288

Adjusted EBITDA
 
14,920

 
17,060

Promotional Solutions:
 
 
 
 
Revenue
 
142,794

 
155,829

Adjusted EBITDA
 
11,197

 
23,590

Checks:
 
 
 
 
Revenue
 
190,644

 
199,798

Adjusted EBITDA
 
90,712

 
102,234

Total segment:
 
 
 
 
Revenue
 
$
486,423

 
$
499,065

Adjusted EBITDA
 
134,852

 
159,751



21

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


The following table presents a reconciliation of total segment adjusted EBITDA to consolidated (loss) income before income taxes:
 
 
Quarter Ended March 31,
(in thousands)
 
2020
 
2019
Total segment adjusted EBITDA
 
$