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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
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.
|
|
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
|
|
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
|
|
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
|
|
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
|
|
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
|
|
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
|
|
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
|
|
|
|
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.
|
|
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
|
|
|
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
|
|
|
|
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.
|
|
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
|
|
|
|
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.
|
|
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
|
|
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
|
|
|
|
|
|