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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 June 30, 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
DELUXELOGO2020BA01.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 July 21, 2020 was 41,858,236.

1


PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share par value)
 
June 30,
2020
 
December 31,
2019
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
371,951

 
$
73,620

Trade accounts receivable, net of allowance for uncollectible accounts of $6,726 and $4,985, respectively
 
140,285

 
163,421

Inventories and supplies
 
47,525

 
39,921

Funds held for customers, including assets carried at fair value of $23,201 and $34,450, respectively
 
82,582

 
117,641

Revenue in excess of billings
 
25,014

 
32,790

Other current assets
 
48,893

 
44,818

Total current assets
 
716,250

 
472,211

Deferred income taxes
 
5,929

 
3,907

Long-term investments
 
44,405

 
44,995

Property, plant and equipment, net of accumulated depreciation of $361,224 and $377,180, respectively
 
77,857

 
96,467

Operating lease assets
 
45,048

 
44,372

Intangibles, net of accumulated amortization of $578,915 and $557,023, respectively
 
230,745

 
276,122

Goodwill
 
736,748

 
804,487

Other non-current assets
 
203,100

 
200,750

Total assets
 
$
2,060,082

 
$
1,943,311

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
103,639

 
$
112,198

Funds held for customers
 
80,672

 
116,411

Accrued liabilities
 
174,210

 
179,338

Total current liabilities
 
358,521

 
407,947

Long-term debt
 
1,140,000

 
883,500

Operating lease liabilities
 
34,165

 
33,585

Deferred income taxes
 
3,243

 
14,898

Other non-current liabilities
 
38,815

 
32,520

Commitments and contingencies (Notes 12 and 15)
 


 


Shareholders' equity:
 
 

 
 

Common shares $1 par value (authorized: 500,000 shares; outstanding: June 30, 2020 – 41,855; December 31, 2019 – 42,126)
 
41,855

 
42,126

Additional paid-in capital
 
4,950

 
4,086

Retained earnings
 
494,243

 
572,596

Accumulated other comprehensive loss
 
(55,779
)
 
(47,947
)
Non-controlling interest
 
69

 

Total shareholders’ equity
 
485,338

 
570,861

Total liabilities and shareholders’ equity
 
$
2,060,082

 
$
1,943,311



See Condensed Notes to Unaudited Consolidated Financial Statements

2


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
 
Quarter Ended
June 30,
 
Six Months Ended
June 30,
(in thousands, except per share amounts)
 
2020
 
2019
 
2020
 
2019
Product revenue
 
$
278,709

 
$
347,061

 
$
609,396

 
$
697,580

Service revenue
 
131,696

 
146,925

 
287,432

 
295,471

Total revenue
 
410,405

 
493,986

 
896,828

 
993,051

Cost of products
 
(102,861
)
 
(133,798
)
 
(224,450
)
 
(265,061
)
Cost of services
 
(59,422
)
 
(68,730
)
 
(139,882
)
 
(137,090
)
Total cost of revenue
 
(162,283
)
 
(202,528
)
 
(364,332
)
 
(402,151
)
Gross profit
 
248,122

 
291,458

 
532,496

 
590,900

Selling, general and administrative expense
 
(198,570
)
 
(222,292
)
 
(435,774
)
 
(452,469
)
Restructuring and integration expense
 
(20,354
)
 
(17,342
)
 
(38,008
)
 
(22,834
)
Asset impairment charges
 
(4,883
)
 

 
(95,213
)
 

Operating income (loss)
 
24,315


51,824

 
(36,499
)
 
115,597

Interest expense
 
(6,171
)
 
(9,239
)
 
(13,171
)
 
(18,540
)
Other income
 
1,808

 
2,168

 
6,281

 
3,934

Income (loss) before income taxes
 
19,952

 
44,753

 
(43,389
)
 
100,991

Income tax provision
 
(5,074
)
 
(12,171
)
 
(1,864
)
 
(27,219
)
Net income (loss)
 
14,878

 
32,582

 
(45,253
)
 
73,772

Net income attributable to non-controlling interest
 
(19
)
 

 
(19
)
 

Net income (loss) attributable to Deluxe
 
$
14,859

 
$
32,582

 
$
(45,272
)
 
$
73,772

Total comprehensive income (loss)
 
$
19,053

 
$
33,744

 
$
(53,085
)
 
$
76,824

Comprehensive income (loss) attributable to Deluxe
 
19,034

 
33,744

 
(53,104
)
 
76,824

Basic earnings (loss) per share
 
0.36

 
0.75

 
(1.08
)
 
1.68

Diluted earnings (loss) per share
 
0.35

 
0.75

 
(1.10
)
 
1.68



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
 
Non-controlling interest
 
Total
Balance, March 31, 2020
 
41,691

 
$
41,691

 
$

 
$
492,230

 
$
(59,954
)
 
$

 
$
473,967

Net income
 

 

 

 
14,859

 

 
19

 
14,878

Cash dividends ($0.30 per share)
 

 

 

 
(12,846
)
 

 

 
(12,846
)
Common shares issued
 
209

 
209

 
465

 

 

 

 
674

Common shares retired
 
(45
)
 
(45
)
 
(1,087
)
 

 

 

 
(1,132
)
Employee share-based compensation
 

 

 
5,572

 

 

 

 
5,572

Other comprehensive income
 

 

 

 

 
4,175

 

 
4,175

Non-controlling interest, net
 

 

 

 

 

 
50

 
50

Balance, June 30, 2020
 
41,855

 
$
41,855

 
$
4,950

 
$
494,243

 
$
(55,779
)
 
$
69

 
$
485,338


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

 
$
42,126

 
$
4,086

 
$
572,596

 
$
(47,947
)
 
$

 
$
570,861

Net loss
 

 

 

 
(45,272
)
 

 
19

 
(45,253
)
Cash dividends ($0.60 per share)
 

 

 

 
(25,707
)
 

 

 
(25,707
)
Common shares issued
 
290

 
290

 
2,267

 

 

 

 
2,557

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

 

 
(14,000
)
Other common shares retired
 
(62
)
 
(62
)
 
(1,866
)
 

 

 

 
(1,928
)
Employee share-based compensation
 

 

 
10,230

 

 

 

 
10,230

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

 

 

 
(3,640
)
 

 

 
(3,640
)
Other comprehensive loss
 

 

 

 

 
(7,832
)
 

 
(7,832
)
Non-controlling interest, net
 

 

 

 

 

 
50

 
50

Balance, June 30, 2020
 
41,855

 
$
41,855

 
$
4,950

 
$
494,243

 
$
(55,779
)
 
$
69

 
$
485,338



See Condensed Notes to Unaudited Consolidated Financial Statements


4


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
(unaudited)

(in thousands,)
 
Common shares
 
Common shares
par value
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Balance, March 31, 2019
 
43,638

 
$
43,638

 
$

 
$
908,614

 
$
(54,689
)
 
$
897,563

Net income
 

 

 

 
32,582

 

 
32,582

Cash dividends ($0.30 per share)
 

 

 

 
(13,296
)
 

 
(13,296
)
Common shares issued
 
13

 
13

 
76

 

 

 
89

Common shares repurchased
 
(718
)
 
(718
)
 
(5,026
)
 
(23,152
)
 

 
(28,896
)
Other common shares retired
 
(5
)
 
(5
)
 
(196
)
 

 

 
(201
)
Employee share-based compensation
 

 

 
5,146

 

 

 
5,146

Other comprehensive income
 

 

 

 

 
1,162

 
1,162

Balance, June 30, 2019
 
42,928

 
$
42,928

 
$

 
$
904,748

 
$
(53,527
)
 
$
894,149


(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
 

 

 

 
73,772

 

 
73,772

Cash dividends ($0.60 per share)
 

 

 

 
(26,467
)
 

 
(26,467
)
Common shares issued
 
99

 
99

 
1,938

 

 

 
2,037

Common shares repurchased
 
(1,757
)
 
(1,757
)
 
(7,504
)
 
(69,635
)
 

 
(78,896
)
Other common shares retired
 
(61
)
 
(61
)
 
(2,810
)
 

 

 
(2,871
)
Employee share-based compensation
 

 

 
8,376

 

 

 
8,376

Adoption of Accounting Standards Update No. 2016-02
 

 

 

 
(267
)
 

 
(267
)
Other comprehensive income
 

 

 

 

 
3,052

 
3,052

Balance, June 30, 2019
 
42,928

 
$
42,928

 
$

 
$
904,748

 
$
(53,527
)
 
$
894,149



See Condensed Notes to Unaudited Consolidated Financial Statements


5


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Six Months Ended June 30,
(in thousands)
 
2020
 
2019
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(45,253
)
 
$
73,772

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

 
 

Depreciation
 
10,053

 
8,448

Amortization of intangibles
 
45,040

 
56,488

Operating lease expense
 
10,038

 
8,782

Asset impairment charges
 
95,213

 

Amortization of prepaid product discounts
 
14,174

 
11,681

Deferred income taxes
 
(10,886
)
 
2,718

Employee share-based compensation expense
 
9,095

 
9,224

Other non-cash items, net
 
14,383

 
7,323

Changes in assets and liabilities:
 
 

 
 

Trade accounts receivable
 
20,054

 
18,881

Inventories and supplies
 
(8,719
)
 
(836
)
Other current assets
 
2,073

 
(11,975
)
Non-current assets
 
(6,646
)
 
(2,249
)
Accounts payable
 
(16,023
)
 
(12,621
)
Prepaid product discount payments
 
(15,806
)
 
(16,182
)
Other accrued and non-current liabilities
 
(7,141
)
 
(48,350
)
Net cash provided by operating activities
 
109,649

 
105,104

Cash flows from investing activities:
 
 

 
 

Purchases of capital assets
 
(27,085
)
 
(32,344
)
Purchases of customer funds marketable securities
 
(3,701
)
 
(3,778
)
Proceeds from customer funds marketable securities
 
3,701

 
3,778

Other
 
1,837

 
(456
)
Net cash used by investing activities
 
(25,248
)
 
(32,800
)
Cash flows from financing activities:
 
 

 
 

Proceeds from issuing long-term debt
 
309,000

 
154,000

Payments on long-term debt
 
(52,500
)
 
(113,000
)
Net change in customer funds obligations
 
(31,351
)
 
(10,677
)
Proceeds from issuing shares under employee plans
 
2,411

 
1,637

Employee taxes paid for shares withheld
 
(1,889
)
 
(2,872
)
Payments for common shares repurchased
 
(14,000
)
 
(78,896
)
Cash dividends paid to shareholders
 
(25,464
)
 
(26,253
)
Other
 
(597
)
 
(1,440
)
Net cash provided (used) by financing activities
 
185,610

 
(77,501
)
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents
 
(6,490
)
 
3,996

Net change in cash, cash equivalents, restricted cash and restricted cash equivalents
 
263,521

 
(1,201
)
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)
 
$
438,332

 
$
144,058



See Condensed Notes to Unaudited Consolidated Financial Statements

6

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 June 30, 2020, the consolidated statements of comprehensive income (loss) for the quarters and six months ended June 30, 2020 and 2019, the consolidated statements of shareholders’ equity for the quarters and six months ended June 30, 2020 and 2019 and the consolidated statements of cash flows for the six months ended June 30, 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 results of which form the basis for making judgments about the carrying values of our 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.

Non-controlling interest Effective April 1, 2020, we executed an agreement to form MedPay Exchange LLC (MPX), which delivers payments to healthcare providers from insurance companies and other payers. This entity is a variable interest entity (VIE), as defined in Accounting Standards Codification Topic 810, Consolidation. As we are the primary beneficiary of the VIE, we are required to consolidate MPX in our consolidated financial statements. Our partner’s interest in MPX is reported as non-controlling interest in the consolidated balance sheet within equity, separate from our equity. Net income (loss) and comprehensive income (loss) are attributed to us and the non-controlling interest. The amounts attributable to the non-controlling interest were not significant for the quarter ended June 30, 2020.
 
Comparability Amounts on the consolidated balance sheet as of December 31, 2019 and amounts within cash flows from operating activities and cash flows from investing activities on the consolidated statement of cash flows for the six months ended June 30, 2019 have been modified to conform to the current year presentation. On the consolidated balance sheet, assets held for sale are included within other non-current assets. In the previous year, this amount was presented separately. 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 amount 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 amount 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 notes 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

7

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

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 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 June 30, 2020, $12,166 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 six months ended June 30, 2020 and 2019 were as follows:
 
 
Six Months Ended June 30,
(in thousands)
 
2020
 
2019
Balance, beginning of year
 
$
4,985

 
$
3,639

Bad debt expense
 
3,374

 
2,549

Write-offs and other
 
(1,633
)
 
(1,669
)
Balance, end of period
 
$
6,726

 
$
4,519



8

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


Inventories and supplies – Inventories and supplies were comprised of the following:
(in thousands)
 
June 30,
2020
 
December 31,
2019
Raw materials
 
$
7,001

 
$
6,977

Semi-finished goods
 
7,070

 
7,368

Finished goods
 
30,082

 
21,982

Supplies
 
3,372

 
3,594

Inventories and supplies
 
$
47,525

 
$
39,921



Available-for-sale debt securities – Available-for-sale debt securities included within funds held for customers were comprised of the following:
 
 
June 30, 2020
(in thousands)
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Funds held for customers:(1)
 
 
 
 
 
 
 
 
Domestic money market fund
 
$
7,000

 
$

 
$

 
$
7,000

Canadian and provincial government securities
 
8,732

 
126

 

 
8,858

Canadian guaranteed investment certificates
 
7,343

 

 

 
7,343

Available-for-sale debt securities
 
$
23,075

 
$
126

 
$

 
$
23,201


(1) Funds held for customers, as reported on the consolidated balance sheet as of June 30, 2020, also included cash of $59,381.

 
 
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 June 30, 2020 were as follows:
(in thousands)
 
Fair value
Due in one year or less
 
$
16,318

Due in two to five years
 
2,861

Due in six to ten years
 
4,022

Available-for-sale debt securities
 
$
23,201



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


9

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

Revenue in excess of billings – 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. This allowance was not significant upon adoption or as of June 30, 2020. Revenue in excess of billings, net of the allowance for uncollectible acounts, was comprised of the following:
(in thousands)
 
June 30,
2020
 
December 31,
2019
Conditional right to receive consideration
 
$
16,839

 
$
24,499

Unconditional right to receive consideration
 
8,175

 
8,291

Revenue in excess of billings
 
$
25,014

 
$
32,790



Intangibles – Intangibles were comprised of the following:
 
 
June 30, 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
 
$
397,913

 
$
(321,204
)
 
$
76,709

 
$
380,905

 
$
(299,698
)
 
$
81,207

Customer lists/relationships
 
310,282

 
(181,761
)
 
128,521

 
348,055

 
(187,462
)
 
160,593

Software to be sold
 
36,900

 
(21,770
)
 
15,130

 
36,900

 
(19,657
)
 
17,243

Technology-based intangibles
 
34,613

 
(25,313
)
 
9,300

 
34,780

 
(22,122
)
 
12,658

Trade names
 
29,952

 
(28,867
)
 
1,085

 
32,505

 
(28,084
)
 
4,421

Intangibles
 
$
809,660

 
$
(578,915
)

$
230,745


$
833,145


$
(557,023
)

$
276,122



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

Amortization of intangibles was $21,529 for the quarter ended June 30, 2020, $28,314 for the quarter ended June 30, 2019, $45,040 for the six months ended June 30, 2020 and $56,488 for the six months ended June 30, 2019. Based on the intangibles in service as of June 30, 2020, estimated future amortization expense is as follows:
(in thousands)
 
Estimated
amortization
expense
Remainder of 2020
 
$
45,590

2021
 
70,492

2022
 
50,044

2023
 
30,139

2024
 
15,616



The following intangibles were acquired during the six months ended June 30, 2020:
(in thousands)
 
Amount
 
Weighted-average amortization period
(in years)
Internal-use software
 
$
20,286

 
3
Customer lists/relationships
 
735

 
5
Acquired intangibles
 
$
21,021

 
4


10

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 six months ended June 30, 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
 

 

 
(66
)
 

 
(66
)
Balance, June 30, 2020
 
$
168,165

 
$
70,926

 
$
62,845

 
$
434,812

 
$
736,748

 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2020:
 
 

 
 

 
 

 
 
 
 

Goodwill, gross
 
$
168,165

 
$
432,984

 
$
252,768

 
$
434,812

 
$
1,288,729

Accumulated impairment charges
 

 
(362,058
)
 
(189,923
)
 

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

 
$
70,926


$
62,845

 
$
434,812


$
736,748


Other non-current assets – Other non-current assets were comprised of the following:
(in thousands)
 
June 30,
2020
 
December 31,
2019
Postretirement benefit plan asset
 
$
59,457

 
$
56,743

Loans and notes receivable from Safeguard distributors, net of allowance for doubtful accounts(1)
 
55,255

 
66,872

Prepaid product discounts
 
43,541

 
51,145

Cloud computing arrangements
 
12,166

 

Deferred sales commissions(2)
 
10,789

 
9,682

Other
 
21,892

 
16,308

Other non-current assets
 
$
203,100

 
$
200,750



(1) Amount Includes the non-current portion of loans and note receivables. The current portion of these receivables is included in other current assets on the consolidated balance sheets and was $3,879 as of June 30, 2020 and $3,511 as of December 31, 2019.

(2) Amortization of deferred sales commissions was $1,817 for the six months ended June 30, 2020 and $1,464 for the six months ended June 30, 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 six months ended June 30, 2020 and 2019 were as follows:
 
 
Six Months Ended June 30,
(in thousands)
 
2020
 
2019
Balance, beginning of year
 
$
284

 
$
284

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

 

Bad debt expense
 
6,623

 

Balance, end of period
 
$
11,656

 
$
284



11

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


Bad debt expense for the six months ended June 30, 2020, included loan-specific allowances primarily related to a distributor that was underperforming. In calculating this reserve, we utilized various valuation techniques to determine the value of the underlying collateral. Other past due receivables and those on non-accrual status were not significant as of June 30, 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 June 30, 2020. There were no write-offs or recoveries recorded during the six months ended June 30, 2020.
 
 
Loans and notes receivable from distributors amortized cost basis by origination year
 
 
(in thousands)
 
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Total
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1-2 internal grade
 
$
1,386

 
$
3,876

 
$
24,310

 
$
22,779

 
$
220

 
$
4,386

 
$
56,957

3-4 internal grade
 

 
2,553

 
7,508

 

 

 
3,772

 
13,833

Loans and notes receivable
 
$
1,386

 
$
6,429

 
$
31,818

 
$
22,779

 
$
220

 
$
8,158

 
$
70,790



Changes in prepaid product discounts during the six months ended June 30, 2020 and 2019 were as follows:
 
 
Six Months Ended June 30,
(in thousands)
 
2020
 
2019
Balance, beginning of year
 
$
51,145

 
$
54,642

Additions(1)
 
7,195

 
12,405

Amortization
 
(14,174
)
 
(11,681
)
Other
 
(625
)
 
(447
)
Balance, end of period
 
$
43,541

 
$
54,919

 
(1) Prepaid product discounts are generally accrued upon contract execution. Cash payments for prepaid product discounts were $15,806 for the six months ended June 30, 2020 and $16,182 for the six months ended June 30, 2019.

Accrued liabilities – Accrued liabilities were comprised of the following:
(in thousands)
 
June 30,
2020
 
December 31,
2019
Deferred revenue(1)
 
$
43,271

 
$
46,098

Employee cash bonuses
 
21,648

 
36,918

Wages
 
17,389

 
6,937

Operating lease liabilities
 
14,320

 
12,898

Prepaid product discounts due within one year
 
8,810

 
14,709

Other
 
68,772

 
61,778

Accrued liabilities
 
$
174,210

 
$
179,338


 
(1) $30,594 of the December 31, 2019 amount was recognized as revenue during the six months ended June 30, 2020.


12

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)
 
June 30,
2020
 
June 30,
2019
Cash and cash equivalents
 
$
371,951

 
$
66,732

Restricted cash and restricted cash equivalents included in funds held for customers
 
66,381

 
77,326

Total cash, cash equivalents, restricted cash and restricted cash equivalents
 
$
438,332

 
$
144,058



 
NOTE 4: EARNINGS (LOSS) PER SHARE

The following table reflects the calculation of basic and diluted earnings (loss) per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted earnings (loss) per share because their effect would have been antidilutive. 
 
 
Quarter Ended
June 30,
 
Six Months Ended
June 30,
(in thousands, except per share amounts)
 
2020
 
2019
 
2020
 
2019
Earnings (loss) per share – basic:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
14,878

 
$
32,582

 
$
(45,253
)
 
$
73,772

Net income attributable to non-controlling interest
 
(19
)
 

 
(19
)
 

Net income (loss) attributable to Deluxe
 
14,859

 
32,582

 
(45,272
)
 
73,772

Income allocated to participating securities
 
(13
)
 
(60
)
 
(32
)
 
(170
)
Income (loss) attributable to Deluxe available to common shareholders
 
$
14,846

 
$
32,522


$
(45,304
)
 
$
73,602

Weighted-average shares outstanding
 
41,797

 
43,400

 
41,946

 
43,697

Earnings (loss) per share – basic
 
$
0.36

 
$
0.75

 
$
(1.08
)
 
$
1.68

 
 
 
 
 
 
 
 
 
Earnings (loss) per share – diluted:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
14,878

 
$
32,582

 
$
(45,253
)
 
$
73,772

Net income attributable to non-controlling interest
 
(19
)
 

 
(19
)
 

Net income (loss) attributable to Deluxe
 
14,859

 
32,582

 
(45,272
)
 
73,772

Income allocated to participating securities
 

 
(10
)
 
(32
)
 
(76
)
Re-measurement of share-based awards classified as liabilities
 
(79
)
 
(44
)
 
(853
)
 
(44
)
Income (loss) attributable to Deluxe available to common shareholders
 
$
14,780

 
$
32,528


$
(46,157
)
 
$
73,652

Weighted-average shares outstanding
 
41,797

 
43,400

 
41,946

 
43,697

Dilutive impact of potential common shares
 
151

 
154

 
40

 
127

Weighted-average shares and potential common shares outstanding
 
41,948

 
43,554


41,986

 
43,824

Earnings (loss) per share – diluted
 
$
0.35

 
$
0.75

 
$
(1.10
)
 
$
1.68

Antidilutive options excluded from calculation
 
2,133

 
1,439

 
2,199

 
1,439





13

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

NOTE 5: OTHER COMPREHENSIVE INCOME (LOSS)

Reclassification adjustments Information regarding amounts reclassified from accumulated other comprehensive loss to net income (loss) was as follows:
Accumulated other comprehensive loss components
 
Amounts reclassified from accumulated other comprehensive loss
 
Affected line item in consolidated statements of comprehensive income (loss)
 
 
Quarter Ended
June 30,
 
Six Months Ended
June 30,
 
 
(in thousands)
 
2020
 
2019
 
2020
 
2019
 
 
Realized loss on interest rate swap
 
$
(281
)
 
$

 
$
(188
)
 
$

 
Interest expense
Tax benefit
 
73

 

 
49

 

 
Income tax provision
Realized loss on interest rate swap, net of tax
 
(208
)
 

 
(139
)
 

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

 
355

 
711

 
711

 
Other income
Net actuarial loss
 
(575
)
 
(806
)
 
(1,150
)
 
(1,612
)
 
Other income
Total amortization
 
(220
)
 
(451
)
 
(439
)
 
(901
)
 
Other income
Tax benefit
 
12

 
71

 
23

 
140

 
Income tax provision
Amortization of postretirement benefit plan items, net of tax
 
(208
)
 
(380
)
 
(416
)
 
(761
)
 
Net income
Total reclassifications, net of tax
 
$
(416
)
 
$
(380
)
 
$
(555
)
 
$
(761
)
 
 


Accumulated other comprehensive loss Changes in the components of accumulated other comprehensive loss during the six months ended June 30, 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
 

 
308

 
(5,395
)
 
(3,300
)
 
(8,387
)
Amounts reclassified from accumulated other comprehensive loss
 
416

 

 
139

 

 
555

Net current-period other comprehensive income (loss)
 
416

 
308

 
(5,256
)
 
(3,300
)
 
(7,832
)
Balance, June 30, 2020
 
$
(27,990
)
 
$
33

 
$
(6,353
)
 
$
(21,469
)
 
$
(55,779
)


(1) Other comprehensive income before reclassifications is net of income tax expense of $107.

(2) Other comprehensive loss before reclassifications is net of an income tax benefit of $1,897.



14

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

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 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 $8,584 as of June 30, 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 June 30, 2020 and December 31, 2019 and its impact on consolidated net income (loss) 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 our 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 as of the measurement date.

There were no triggering events during the second quarter of 2020 that required us to analyze goodwill for impairment.

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

15

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

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 six months of 2020, we recorded asset impairment charges of $7,110 related to the rationalization of our real estate footprint, as well as internal-use software held for sale as of December 31, 2019 and a small business customer list. These assets were written down to their estimated fair values less costs to sell.

Asset impairment analyses completed during the six months ended June 30, 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)
 
Cloud Solutions Web Hosting assets:
 
 
 
 
 
 
 
 
 
 
Customer lists
 
$

 
$

 
$

 
$

 
$
8,397

Internal-use software
 
2,172

 

 

 
2,172

 
6,932

Other
 

 

 

 

 
2,349

Cloud Solutions Web Hosting assets
 
 
 
 
 
 
 
 
 
17,678

Small business distributor
 
7,622

 

 

 
7,622

 
2,752

Other assets
 
11,210

 

 

 
11,210

 
7,110

Goodwill
 
 
 
 
 
 
 
 
 
67,673

Total