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|
|
Item 1. FINANCIAL STATEMENTS
|
|
|
|
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share par value)
|
|
September 30,
2020
|
|
December 31,
2019
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents, including securities carried at fair value of $35,009 and $9,713, respectively
|
|
$
|
310,430
|
|
|
$
|
73,620
|
|
Trade accounts receivable, net of allowance for uncollectible accounts of $6,488 and $4,985, respectively
|
|
138,349
|
|
|
163,421
|
|
Inventories and supplies
|
|
50,512
|
|
|
39,921
|
|
Funds held for customers, including securities carried at fair value of $23,613 and $34,450, respectively
|
|
106,199
|
|
|
117,641
|
|
Revenue in excess of billings
|
|
29,307
|
|
|
32,790
|
|
Other current assets
|
|
43,139
|
|
|
44,818
|
|
Total current assets
|
|
677,936
|
|
|
472,211
|
|
Deferred income taxes
|
|
5,834
|
|
|
3,907
|
|
Long-term investments
|
|
45,522
|
|
|
44,995
|
|
Property, plant and equipment, net of accumulated depreciation of $365,250 and $377,180, respectively
|
|
80,694
|
|
|
96,467
|
|
Operating lease assets
|
|
40,475
|
|
|
44,372
|
|
Intangibles, net of accumulated amortization of $596,778 and $557,023, respectively
|
|
234,764
|
|
|
276,122
|
|
Goodwill
|
|
736,779
|
|
|
804,487
|
|
Other non-current assets
|
|
185,175
|
|
|
200,750
|
|
Total assets
|
|
$
|
2,007,179
|
|
|
$
|
1,943,311
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
113,120
|
|
|
$
|
112,198
|
|
Funds held for customers
|
|
104,197
|
|
|
116,411
|
|
Accrued liabilities
|
|
161,542
|
|
|
179,338
|
|
Total current liabilities
|
|
378,859
|
|
|
407,947
|
|
Long-term debt
|
|
1,040,000
|
|
|
883,500
|
|
Operating lease liabilities
|
|
30,909
|
|
|
33,585
|
|
Deferred income taxes
|
|
4,794
|
|
|
14,898
|
|
Other non-current liabilities
|
|
41,173
|
|
|
32,520
|
|
Commitments and contingencies (Notes 12 and 15)
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
Common shares $1 par value (authorized: 500,000 shares; outstanding: September 30, 2020 – 41,893; December 31, 2019 – 42,126)
|
|
41,893
|
|
|
42,126
|
|
Additional paid-in capital
|
|
11,554
|
|
|
4,086
|
|
Retained earnings
|
|
510,805
|
|
|
572,596
|
|
Accumulated other comprehensive loss
|
|
(52,904)
|
|
|
(47,947)
|
|
Non-controlling interest
|
|
96
|
|
|
—
|
|
Total shareholders’ equity
|
|
511,444
|
|
|
570,861
|
|
Total liabilities and shareholders’ equity
|
|
$
|
2,007,179
|
|
|
$
|
1,943,311
|
|
See Condensed Notes to Unaudited Consolidated Financial Statements
|
|
|
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands, except per share amounts)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Product revenue
|
|
$
|
298,751
|
|
|
$
|
346,315
|
|
|
$
|
908,146
|
|
|
$
|
1,043,896
|
|
Service revenue
|
|
140,710
|
|
|
147,278
|
|
|
428,142
|
|
|
442,749
|
|
Total revenue
|
|
439,461
|
|
|
493,593
|
|
|
1,336,288
|
|
|
1,486,645
|
|
Cost of products
|
|
(108,369)
|
|
|
(133,807)
|
|
|
(332,818)
|
|
|
(398,869)
|
|
Cost of services
|
|
(66,092)
|
|
|
(69,916)
|
|
|
(205,974)
|
|
|
(207,006)
|
|
Total cost of revenue
|
|
(174,461)
|
|
|
(203,723)
|
|
|
(538,792)
|
|
|
(605,875)
|
|
Gross profit
|
|
265,000
|
|
|
289,870
|
|
|
797,496
|
|
|
880,770
|
|
Selling, general and administrative expense
|
|
(198,871)
|
|
|
(213,318)
|
|
|
(634,645)
|
|
|
(665,787)
|
|
Restructuring and integration expense
|
|
(18,949)
|
|
|
(26,255)
|
|
|
(56,957)
|
|
|
(49,089)
|
|
Asset impairment charges
|
|
(2,760)
|
|
|
(390,980)
|
|
|
(97,973)
|
|
|
(390,980)
|
|
Operating income (loss)
|
|
44,420
|
|
|
(340,683)
|
|
|
7,921
|
|
|
(225,086)
|
|
Interest expense
|
|
(5,083)
|
|
|
(8,710)
|
|
|
(18,254)
|
|
|
(27,251)
|
|
Other income
|
|
2,201
|
|
|
2,183
|
|
|
8,482
|
|
|
6,118
|
|
Income (loss) before income taxes
|
|
41,538
|
|
|
(347,210)
|
|
|
(1,851)
|
|
|
(246,219)
|
|
Income tax (provision) benefit
|
|
(12,094)
|
|
|
28,717
|
|
|
(13,958)
|
|
|
1,498
|
|
Net income (loss)
|
|
29,444
|
|
|
(318,493)
|
|
|
(15,809)
|
|
|
(244,721)
|
|
Net income attributable to non-controlling interest
|
|
(27)
|
|
|
—
|
|
|
(46)
|
|
|
—
|
|
Net income (loss) attributable to Deluxe
|
|
$
|
29,417
|
|
|
$
|
(318,493)
|
|
|
$
|
(15,855)
|
|
|
$
|
(244,721)
|
|
Total comprehensive income (loss)
|
|
$
|
32,319
|
|
|
$
|
(322,150)
|
|
|
$
|
(20,766)
|
|
|
$
|
(245,326)
|
|
Comprehensive income (loss) attributable to Deluxe
|
|
32,292
|
|
|
(322,150)
|
|
|
(20,812)
|
|
|
(245,326)
|
|
Basic earnings (loss) per share
|
|
0.70
|
|
|
(7.49)
|
|
|
(0.38)
|
|
|
(5.65)
|
|
Diluted earnings (loss) per share
|
|
0.70
|
|
|
(7.49)
|
|
|
(0.40)
|
|
|
(5.65)
|
|
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, June 30, 2020
|
|
41,855
|
|
|
$
|
41,855
|
|
|
$
|
4,950
|
|
|
$
|
494,243
|
|
|
$
|
(55,779)
|
|
|
$
|
69
|
|
|
$
|
485,338
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,417
|
|
|
—
|
|
|
27
|
|
|
29,444
|
|
Cash dividends ($0.30 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,855)
|
|
|
—
|
|
|
—
|
|
|
(12,855)
|
|
Common shares issued
|
|
44
|
|
|
44
|
|
|
593
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
637
|
|
Common shares retired
|
|
(6)
|
|
|
(6)
|
|
|
(128)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(134)
|
|
Employee share-based compensation
|
|
—
|
|
|
—
|
|
|
6,139
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,139
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,875
|
|
|
—
|
|
|
2,875
|
|
Balance, September 30, 2020
|
|
41,893
|
|
|
$
|
41,893
|
|
|
$
|
11,554
|
|
|
$
|
510,805
|
|
|
$
|
(52,904)
|
|
|
$
|
96
|
|
|
$
|
511,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,855)
|
|
|
—
|
|
|
46
|
|
|
(15,809)
|
|
Cash dividends ($0.90 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(38,562)
|
|
|
—
|
|
|
—
|
|
|
(38,562)
|
|
Common shares issued
|
|
334
|
|
|
334
|
|
|
2,860
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,194
|
|
Common shares repurchased
|
|
(499)
|
|
|
(499)
|
|
|
(9,767)
|
|
|
(3,734)
|
|
|
—
|
|
|
—
|
|
|
(14,000)
|
|
Other common shares retired
|
|
(68)
|
|
|
(68)
|
|
|
(1,994)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,062)
|
|
Employee share-based compensation
|
|
—
|
|
|
—
|
|
|
16,369
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,369
|
|
Adoption of Accounting Standards Update No. 2016-13 (Note 2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,640)
|
|
|
—
|
|
|
—
|
|
|
(3,640)
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,957)
|
|
|
—
|
|
|
(4,957)
|
|
Non-controlling interest, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50
|
|
|
50
|
|
Balance, September 30, 2020
|
|
41,893
|
|
|
$
|
41,893
|
|
|
$
|
11,554
|
|
|
$
|
510,805
|
|
|
$
|
(52,904)
|
|
|
$
|
96
|
|
|
$
|
511,444
|
|
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, June 30, 2019
|
|
42,928
|
|
|
$
|
42,928
|
|
|
$
|
—
|
|
|
$
|
904,748
|
|
|
$
|
(53,527)
|
|
|
$
|
894,149
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(318,493)
|
|
|
—
|
|
|
(318,493)
|
|
Cash dividends ($0.30 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,977)
|
|
|
—
|
|
|
(12,977)
|
|
Common shares issued
|
|
51
|
|
|
51
|
|
|
1,472
|
|
|
—
|
|
|
—
|
|
|
1,523
|
|
Common shares repurchased
|
|
(876)
|
|
|
(876)
|
|
|
(6,109)
|
|
|
(32,666)
|
|
|
—
|
|
|
(39,651)
|
|
Other common shares retired
|
|
(4)
|
|
|
(4)
|
|
|
(200)
|
|
|
—
|
|
|
—
|
|
|
(204)
|
|
Employee share-based compensation
|
|
—
|
|
|
—
|
|
|
4,837
|
|
|
—
|
|
|
—
|
|
|
4,837
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,657)
|
|
|
(3,657)
|
|
Balance, September 30, 2019
|
|
42,099
|
|
|
$
|
42,099
|
|
|
$
|
—
|
|
|
$
|
540,612
|
|
|
$
|
(57,184)
|
|
|
$
|
525,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(244,721)
|
|
|
—
|
|
|
(244,721)
|
|
Cash dividends ($0.90 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(39,445)
|
|
|
—
|
|
|
(39,445)
|
|
Common shares issued
|
|
150
|
|
|
150
|
|
|
3,411
|
|
|
—
|
|
|
—
|
|
|
3,561
|
|
Common shares repurchased
|
|
(2,632)
|
|
|
(2,632)
|
|
|
(13,615)
|
|
|
(102,300)
|
|
|
—
|
|
|
(118,547)
|
|
Other common shares retired
|
|
(66)
|
|
|
(66)
|
|
|
(3,010)
|
|
|
—
|
|
|
—
|
|
|
(3,076)
|
|
Employee share-based compensation
|
|
—
|
|
|
—
|
|
|
13,214
|
|
|
—
|
|
|
—
|
|
|
13,214
|
|
Adoption of Accounting Standards Update No. 2016-02
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(267)
|
|
|
—
|
|
|
(267)
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(605)
|
|
|
(605)
|
|
Balance, September 30, 2019
|
|
42,099
|
|
|
$
|
42,099
|
|
|
$
|
—
|
|
|
$
|
540,612
|
|
|
$
|
(57,184)
|
|
|
$
|
525,527
|
|
See Condensed Notes to Unaudited Consolidated Financial Statements
|
|
|
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(in thousands)
|
|
2020
|
|
2019
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
|
$
|
(15,809)
|
|
|
$
|
(244,721)
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
Depreciation
|
|
15,510
|
|
|
12,206
|
|
Amortization of intangibles
|
|
67,555
|
|
|
83,224
|
|
Operating lease expense
|
|
15,044
|
|
|
15,145
|
|
Asset impairment charges
|
|
97,973
|
|
|
390,980
|
|
Amortization of prepaid product discounts
|
|
21,725
|
|
|
17,861
|
|
Deferred income taxes
|
|
(9,395)
|
|
|
(38,549)
|
|
Employee share-based compensation expense
|
|
15,335
|
|
|
14,580
|
|
Other non-cash items, net
|
|
15,231
|
|
|
10,082
|
|
Changes in assets and liabilities:
|
|
|
|
|
Trade accounts receivable
|
|
21,376
|
|
|
27,505
|
|
Inventories and supplies
|
|
(11,938)
|
|
|
2,728
|
|
Other current assets
|
|
2,158
|
|
|
(3,213)
|
|
Non-current assets
|
|
(13,335)
|
|
|
(3,346)
|
|
Accounts payable
|
|
(9,830)
|
|
|
(10,779)
|
|
Prepaid product discount payments
|
|
(24,947)
|
|
|
(20,370)
|
|
Other accrued and non-current liabilities
|
|
(19,842)
|
|
|
(45,309)
|
|
Net cash provided by operating activities
|
|
166,811
|
|
|
208,024
|
|
Cash flows from investing activities:
|
|
|
|
|
Purchases of capital assets
|
|
(42,707)
|
|
|
(49,679)
|
|
Proceeds from sale of facilities
|
|
9,713
|
|
|
—
|
|
Purchases of customer funds marketable securities
|
|
(3,742)
|
|
|
(3,817)
|
|
Proceeds from customer funds marketable securities
|
|
3,742
|
|
|
3,817
|
|
Other
|
|
1,326
|
|
|
3,147
|
|
Net cash used by investing activities
|
|
(31,668)
|
|
|
(46,532)
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from issuing long-term debt
|
|
309,000
|
|
|
203,500
|
|
Payments on long-term debt
|
|
(152,500)
|
|
|
(189,500)
|
|
Net change in customer funds obligations
|
|
(9,375)
|
|
|
(8,711)
|
|
Proceeds from issuing shares under employee plans
|
|
3,048
|
|
|
3,159
|
|
Employee taxes paid for shares withheld
|
|
(2,023)
|
|
|
(3,076)
|
|
Payments for common shares repurchased
|
|
(14,000)
|
|
|
(118,547)
|
|
Cash dividends paid to shareholders
|
|
(38,057)
|
|
|
(39,068)
|
|
Other
|
|
(2,734)
|
|
|
(5,001)
|
|
Net cash provided (used) by financing activities
|
|
93,359
|
|
|
(157,244)
|
|
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents
|
|
(3,297)
|
|
|
2,604
|
|
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents
|
|
225,205
|
|
|
6,852
|
|
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)
|
|
$
|
400,016
|
|
|
$
|
152,111
|
|
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 September 30, 2020, the consolidated statements of comprehensive income (loss) for the quarters and nine months ended September 30, 2020 and 2019, the consolidated statements of shareholders’ equity for the quarters and nine months ended September 30, 2020 and 2019 and the consolidated statements of cash flows for the nine months ended September 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 on the consolidated statements of comprehensive income (loss). The amounts attributable to the non-controlling interest were not significant for the quarter or nine months ended September 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 nine months ended September 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.
During the quarter ended September 30, 2020, we identified the incorrect presentation of certain amounts reported in the 2019 consolidated statements of cash flows. We determined that holdback payments for acquisitions and asset purchases were incorrectly included in net cash used by investing activities and should be included in net cash used by financing activities. We determined that the amounts impacting payments for acquisitions were not material to the consolidated financial statements for the nine months ended September 30, 2019, and the presentation of these amounts has been corrected in the consolidated statement of cash flows for the nine months ended September 30, 2019 appearing herein. This revision had no impact on the amount reported for cash, cash equivalents, restricted cash and restricted cash equivalents as of September 30, 2019.
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
The impact of the revision on the consolidated statement of cash flows for the nine months ended September 30, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
As previously reported
|
|
Adjustment
|
|
As revised
|
Payments for acquisitions, net of cash acquired
|
|
$
|
(1,598)
|
|
|
$
|
1,598
|
|
|
$
|
—
|
|
Other
|
|
1,398
|
|
|
1,749
|
|
|
3,147
|
|
Net cash used by investing activities
|
|
(49,879)
|
|
|
3,347
|
|
|
(46,532)
|
|
Other
|
|
(1,654)
|
|
|
(3,347)
|
|
|
(5,001)
|
|
Net cash used by financing activities
|
|
(153,897)
|
|
|
(3,347)
|
|
|
(157,244)
|
|
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents
|
|
$
|
6,852
|
|
|
$
|
—
|
|
|
$
|
6,852
|
|
|
|
|
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 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
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
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 September 30, 2020, $19,617 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 nine months ended September 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
|
2020
|
|
2019
|
Balance, beginning of year
|
|
$
|
4,985
|
|
|
$
|
3,639
|
|
Bad debt expense
|
|
4,174
|
|
|
3,718
|
|
Write-offs and other
|
|
(2,671)
|
|
|
(2,537)
|
|
Balance, end of period
|
|
$
|
6,488
|
|
|
$
|
4,820
|
|
Inventories and supplies – Inventories and supplies were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30,
2020
|
|
December 31,
2019
|
Raw materials
|
|
$
|
7,025
|
|
|
$
|
6,977
|
|
Semi-finished goods
|
|
7,151
|
|
|
7,368
|
|
Finished goods
|
|
33,144
|
|
|
21,982
|
|
Supplies
|
|
3,192
|
|
|
3,594
|
|
Inventories and supplies
|
|
$
|
50,512
|
|
|
$
|
39,921
|
|
Available-for-sale debt securities – Available-for-sale debt securities included within funds held for customers were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
8,968
|
|
|
137
|
|
|
—
|
|
|
9,105
|
|
Canadian guaranteed investment certificates
|
|
7,508
|
|
|
—
|
|
|
—
|
|
|
7,508
|
|
Available-for-sale debt securities
|
|
$
|
23,476
|
|
|
$
|
137
|
|
|
$
|
—
|
|
|
$
|
23,613
|
|
(1) Funds held for customers, as reported on the consolidated balance sheet as of September 30, 2020, also included cash of $82,586.
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair value
|
Due in one year or less
|
|
$
|
13,057
|
|
Due in two to five years
|
|
6,595
|
|
Due in six to ten years
|
|
3,961
|
|
Available-for-sale debt securities
|
|
$
|
23,613
|
|
Further information regarding the fair value of available-for-sale debt securities can be found in Note 7.
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 September 30, 2020. Revenue in excess of billings, net of the allowance for uncollectible accounts, was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30,
2020
|
|
December 31,
2019
|
Conditional right to receive consideration
|
|
$
|
19,611
|
|
|
$
|
24,499
|
|
Unconditional right to receive consideration
|
|
9,696
|
|
|
8,291
|
|
Revenue in excess of billings
|
|
$
|
29,307
|
|
|
$
|
32,790
|
|
Intangibles – Intangibles were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
$
|
400,964
|
|
|
$
|
(325,746)
|
|
|
$
|
75,218
|
|
|
$
|
380,905
|
|
|
$
|
(299,698)
|
|
|
$
|
81,207
|
|
Customer lists/relationships
|
|
328,967
|
|
|
(191,964)
|
|
|
137,003
|
|
|
348,055
|
|
|
(187,462)
|
|
|
160,593
|
|
Software to be sold
|
|
36,900
|
|
|
(22,827)
|
|
|
14,073
|
|
|
36,900
|
|
|
(19,657)
|
|
|
17,243
|
|
Technology-based intangibles
|
|
34,613
|
|
|
(26,863)
|
|
|
7,750
|
|
|
34,780
|
|
|
(22,122)
|
|
|
12,658
|
|
Trade names
|
|
30,098
|
|
|
(29,378)
|
|
|
720
|
|
|
32,505
|
|
|
(28,084)
|
|
|
4,421
|
|
Intangibles
|
|
$
|
831,542
|
|
|
$
|
(596,778)
|
|
|
$
|
234,764
|
|
|
$
|
833,145
|
|
|
$
|
(557,023)
|
|
|
$
|
276,122
|
|
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
During the nine months ended September 30, 2020, we recorded asset impairment charges related to certain intangible assets. Further information can be found in Note 7.
Amortization of intangibles was $22,515 for the quarter ended September 30, 2020, $26,736 for the quarter ended September 30, 2019, $67,555 for the nine months ended September 30, 2020 and $83,224 for the nine months ended September 30, 2019. Based on the intangibles in service as of September 30, 2020, estimated future amortization expense is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Estimated
amortization
expense
|
Remainder of 2020
|
|
$
|
23,996
|
|
2021
|
|
75,519
|
|
2022
|
|
51,087
|
|
2023
|
|
33,349
|
|
2024
|
|
18,185
|
|
The following intangibles were acquired during the nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
|
Weighted-average amortization period
(in years)
|
Internal-use software
|
|
$
|
28,268
|
|
|
3
|
Customer lists/relationships
|
|
21,627
|
|
|
7
|
Acquired intangibles
|
|
$
|
49,895
|
|
|
5
|
Goodwill – Changes in goodwill by reportable segment and in total for the nine months ended September 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
|
|
—
|
|
|
—
|
|
|
(35)
|
|
|
—
|
|
|
(35)
|
|
Balance, September 30, 2020
|
|
$
|
168,165
|
|
|
$
|
70,926
|
|
|
$
|
62,876
|
|
|
$
|
434,812
|
|
|
$
|
736,779
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
$
|
168,165
|
|
|
$
|
432,984
|
|
|
$
|
252,799
|
|
|
$
|
434,812
|
|
|
$
|
1,288,760
|
|
Accumulated impairment charges
|
|
—
|
|
|
(362,058)
|
|
|
(189,923)
|
|
|
—
|
|
|
(551,981)
|
|
Goodwill, net of accumulated impairment charges
|
|
$
|
168,165
|
|
|
$
|
70,926
|
|
|
$
|
62,876
|
|
|
$
|
434,812
|
|
|
$
|
736,779
|
|
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
Other non-current assets – Other non-current assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30,
2020
|
|
December 31,
2019
|
Postretirement benefit plan asset
|
|
$
|
61,366
|
|
|
$
|
56,743
|
|
Prepaid product discounts
|
|
41,249
|
|
|
51,145
|
|
Loans and notes receivable from Safeguard distributors, net of allowance for doubtful accounts(1)
|
|
38,648
|
|
|
66,872
|
|
Cloud computing arrangements
|
|
19,617
|
|
|
—
|
|
Deferred sales commissions(2)
|
|
10,106
|
|
|
9,682
|
|
Other
|
|
14,189
|
|
|
16,308
|
|
Other non-current assets
|
|
$
|
185,175
|
|
|
$
|
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 $2,935 as of September 30, 2020 and $3,511 as of December 31, 2019.
(2) Amortization of deferred sales commissions was $2,756 for the nine months ended September 30, 2020 and $2,246 for the nine months ended September 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 nine months ended September 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
|
2020
|
|
2019
|
Balance, beginning of year
|
|
$
|
284
|
|
|
$
|
284
|
|
Adoption of ASU No. 2016-13 (Note 2)
|
|
4,749
|
|
|
—
|
|
Bad debt expense
|
|
5,647
|
|
|
—
|
|
Exchange for customer lists
|
|
(6,402)
|
|
|
—
|
|
Balance, end of period
|
|
$
|
4,278
|
|
|
$
|
284
|
|
Bad debt expense for the nine months ended September 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. During the third quarter of 2020, this note receivable was exchanged for the underlying collateral, which consisted of a customer list intangible asset. As such, the note receivable and the related allowance were reversed. Past due receivables and those on non-accrual status were not significant as of September 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.
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
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 September 30, 2020. There were no write-offs and no recoveries recorded during the nine months ended September 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
|
|
$
|
1,361
|
|
|
$
|
2,003
|
|
|
$
|
23,843
|
|
|
$
|
11,731
|
|
|
$
|
216
|
|
|
$
|
4,135
|
|
|
$
|
43,289
|
|
3-4 internal grade
|
|
—
|
|
|
2,572
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,572
|
|
Loans and notes receivable
|
|
$
|
1,361
|
|
|
$
|
4,575
|
|
|
$
|
23,843
|
|
|
$
|
11,731
|
|
|
$
|
216
|
|
|
$
|
4,135
|
|
|
$
|
45,861
|
|
Changes in prepaid product discounts during the nine months ended September 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
|
2020
|
|
2019
|
Balance, beginning of year
|
|
$
|
51,145
|
|
|
$
|
54,642
|
|
Additions(1)
|
|
13,259
|
|
|
15,275
|
|
Amortization
|
|
(21,725)
|
|
|
(17,861)
|
|
Other
|
|
(1,430)
|
|
|
(308)
|
|
Balance, end of period
|
|
$
|
41,249
|
|
|
$
|
51,748
|
|
(1) Prepaid product discounts are generally accrued upon contract execution. Cash payments for prepaid product discounts were $24,947 for the nine months ended September 30, 2020 and $20,370 for the nine months ended September 30, 2019.
Accrued liabilities – Accrued liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30,
2020
|
|
December 31,
2019
|
Deferred revenue(1)
|
|
$
|
37,933
|
|
|
$
|
46,098
|
|
Employee cash bonuses
|
|
24,980
|
|
|
36,918
|
|
Wages
|
|
14,261
|
|
|
6,937
|
|
Operating lease liabilities
|
|
12,769
|
|
|
12,898
|
|
Prepaid product discounts due within one year
|
|
6,028
|
|
|
14,709
|
|
Other
|
|
65,571
|
|
|
61,778
|
|
Accrued liabilities
|
|
$
|
161,542
|
|
|
$
|
179,338
|
|
(1) $37,411 of the December 31, 2019 amount was recognized as revenue during the nine months ended September 30, 2020.
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)
|
|
September 30,
2020
|
|
September 30,
2019
|
Cash and cash equivalents
|
|
$
|
310,430
|
|
|
$
|
73,472
|
|
Restricted cash and restricted cash equivalents included in funds held for customers
|
|
89,586
|
|
|
78,639
|
|
Total cash, cash equivalents, restricted cash and restricted cash equivalents
|
|
$
|
400,016
|
|
|
$
|
152,111
|
|
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
|
|
|
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
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands, except per share amounts)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Earnings (loss) per share – basic:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
29,444
|
|
|
$
|
(318,493)
|
|
|
$
|
(15,809)
|
|
|
$
|
(244,721)
|
|
Net income attributable to non-controlling interest
|
|
(27)
|
|
|
—
|
|
|
(46)
|
|
|
—
|
|
Net income (loss) attributable to Deluxe
|
|
29,417
|
|
|
(318,493)
|
|
|
(15,855)
|
|
|
(244,721)
|
|
Income allocated to participating securities
|
|
(24)
|
|
|
(24)
|
|
|
(42)
|
|
|
(79)
|
|
Income (loss) attributable to Deluxe available to common shareholders
|
|
$
|
29,393
|
|
|
$
|
(318,517)
|
|
|
$
|
(15,897)
|
|
|
$
|
(244,800)
|
|
Weighted-average shares outstanding
|
|
41,872
|
|
|
42,533
|
|
|
41,927
|
|
|
43,312
|
|
Earnings (loss) per share – basic
|
|
$
|
0.70
|
|
|
$
|
(7.49)
|
|
|
$
|
(0.38)
|
|
|
$
|
(5.65)
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – diluted:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
29,444
|
|
|
$
|
(318,493)
|
|
|
$
|
(15,809)
|
|
|
$
|
(244,721)
|
|
Net income attributable to non-controlling interest
|
|
(27)
|
|
|
—
|
|
|
(46)
|
|
|
—
|
|
Net income (loss) attributable to Deluxe
|
|
29,417
|
|
|
(318,493)
|
|
|
(15,855)
|
|
|
(244,721)
|
|
Income allocated to participating securities
|
|
—
|
|
|
(24)
|
|
|
(42)
|
|
|
(79)
|
|
Re-measurement of share-based awards classified as liabilities
|
|
—
|
|
|
—
|
|
|
(794)
|
|
|
—
|
|
Income (loss) attributable to Deluxe available to common shareholders
|
|
$
|
29,417
|
|
|
$
|
(318,517)
|
|
|
$
|
(16,691)
|
|
|
$
|
(244,800)
|
|
Weighted-average shares outstanding
|
|
41,872
|
|
|
42,533
|
|
|
41,927
|
|
|
43,312
|
|
Dilutive impact of potential common shares
|
|
119
|
|
|
—
|
|
|
40
|
|
|
—
|
|
Weighted-average shares and potential common shares outstanding
|
|
41,991
|
|
|
42,533
|
|
|
41,967
|
|
|
43,312
|
|
Earnings (loss) per share – diluted
|
|
$
|
0.70
|
|
|
$
|
(7.49)
|
|
|
$
|
(0.40)
|
|
|
$
|
(5.65)
|
|
Antidilutive options excluded from calculation
|
|
2,086
|
|
|
1,422
|
|
|
2,160
|
|
|
1,422
|
|
|
|
|
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
Realized (loss) gain on interest rate swap
|
|
$
|
(326)
|
|
|
$
|
81
|
|
|
$
|
(514)
|
|
|
$
|
81
|
|
|
Interest expense
|
Tax benefit (provision)
|
|
85
|
|
|
(21)
|
|
|
134
|
|
|
(21)
|
|
|
Income tax (provision) benefit
|
Realized (loss) gain on interest rate swap, net of tax
|
|
(241)
|
|
|
60
|
|
|
(380)
|
|
|
60
|
|
|
Net income (loss)
|
Amortization of postretirement benefit plan items:
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
355
|
|
|
355
|
|
|
1,066
|
|
|
1,066
|
|
|
Other income
|
Net actuarial loss
|
|
(575)
|
|
|
(806)
|
|
|
(1,725)
|
|
|
(2,417)
|
|
|
Other income
|
Total amortization
|
|
(220)
|
|
|
(451)
|
|
|
(659)
|
|
|
(1,351)
|
|
|
Other income
|
Tax benefit
|
|
12
|
|
|
70
|
|
|
35
|
|
|
209
|
|
|
Income tax (provision) benefit
|
Amortization of postretirement benefit plan items, net of tax
|
|
(208)
|
|
|
(381)
|
|
|
(624)
|
|
|
(1,142)
|
|
|
Net income (loss)
|
Total reclassifications, net of tax
|
|
$
|
(449)
|
|
|
$
|
(321)
|
|
|
$
|
(1,004)
|
|
|
$
|
(1,082)
|
|
|
|
Accumulated other comprehensive loss – Changes in the components of accumulated other comprehensive loss during the nine months ended September 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
|
|
—
|
|
|
314
|
|
|
(5,240)
|
|
|
(1,035)
|
|
|
(5,961)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
624
|
|
|
—
|
|
|
380
|
|
|
—
|
|
|
1,004
|
|
Net current-period other comprehensive income (loss)
|
|
624
|
|
|
314
|
|
|
(4,860)
|
|
|
(1,035)
|
|
|
(4,957)
|
|
Balance, September 30, 2020
|
|
$
|
(27,782)
|
|
|
$
|
39
|
|
|
$
|
(5,957)
|
|
|
$
|
(19,204)
|
|
|
$
|
(52,904)
|
|
(1) Other comprehensive income before reclassifications is net of income tax expense of $110.
(2) Other comprehensive loss before reclassifications is net of an income tax benefit of $1,840.
|
|
|
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 $8,046 as of September 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 September 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.
First quarter 2020 goodwill impairment analyses – 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%.
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 pandemic 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.
2020 annual impairment analysis – In completing the 2020 annual impairment analysis of goodwill, we elected to perform qualitative analyses for 2 of our reporting units: Payments and Checks. These 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 most recent quantitative analyses we completed, which indicated that the estimated
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
fair values of these reporting units exceeded their carrying values by approximately $490,000 and $955,000, or by 189% and 180% above the carrying values of their net assets. In completing these assessments, we noted no changes in events or circumstance that indicated that it was more likely than not that the fair value of either reporting unit was less than its carrying amount.
We elected to perform quantitative analyses for our other 2 reporting units: Cloud Data Analytics and Promotional Solutions. These quantitative analyses indicated that the estimated fair values of these reporting units exceeded their carrying values by approximately $100,000 and $210,000, or by 63% and 132% above the carrying values of their net assets. As such, no goodwill impairment charges were recorded as a result of our annual impairment analysis.
Other nonrecurring asset impairment analyses – As a result of the impacts of the COVID-19 pandemic, we assessed for impairment certain long-lived assets of our Cloud Solutions Web Hosting reporting unit as of March 31, 2020. As a result of these assessments, we recorded asset impairment charges of $17,678 related to certain customer list, software and trade name intangible assets. With the exception of certain internal-use software assets, we determined that the assets were fully impaired. We utilized the discounted value of estimated future cash flows to estimate the fair value of the asset group. In our analysis, we assumed a revenue decline of 31% and a gross margin decline of 5.2 points in 2020, as well as a discount rate of 9%.
During the first quarter of 2020, we assessed for impairment the carrying value of an asset group related to a small business distributor that we previously purchased. Our assessment was the result of customer attrition during the quarter that impacted our projections of future cash flows. Based on our estimate of discounted future cash flows, we determined that the asset group was partially impaired as of February 29, 2020, and we recorded an asset impairment charge of $2,752, reducing the carrying value of the related customer list intangible asset. During the third quarter of 2020, as customer attrition continued, we again assessed this asset group for impairment and recorded an additional asset impairment charge of $2,356, bringing the total impairment charge to $5,108 in 2020. In calculating the estimated fair value of the asset group as of September 30, 2020, we assumed no revenue growth, a 1.0 point improvement in gross margin and a discount rate of 11%.
Also during the first nine months of 2020, we recorded asset impairment charges of $7,514 related primarily to the rationalization of our real estate footprint, as well as internal-use software held for sale as of December 31, 2019. These assets were written down to their estimated fair values less costs to sell and the sale of the related real estate assets was completed during the quarter ended September 30, 2020.
Asset impairment analyses completed during the nine months ended September 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
|
|
4,479
|
|
|
—
|
|
|
—
|
|
|
4,479
|
|
|
5,108
|
|
Other assets
|
|
11,210
|
|
|
—
|
|
|
—
|
|
|
11,210
|
|
|
7,514
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
67,673
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
97,973
|
|
Recurring fair value measurements – Cash and cash equivalents as of September 30, 2020 included investments in money market funds that have been designated as trading securities. Because of the short-term nature of the underlying investments, the cost of these funds approximates their fair values.
Funds held for customers included available-for-sale debt securities (Note 3). These securities included a money market fund that is traded in an active market, a mutual fund investment that invests in Canadian and provincial government
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
securities, and investments in Canadian guaranteed investment certificates (GICs) with maturities of 1 to 2 years. The cost of the money market fund approximates its fair value because of the short-term nature of the investment. The mutual fund investment is not traded in an active market and its fair value is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss on the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue on the consolidated statements of comprehensive income (loss) and were not significant for the quarters or nine months ended September 30, 2020 and 2019.
Information regarding the fair values of our financial instruments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
|
|
|
|
September 30, 2020
|
|
Quoted prices in active markets for identical assets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
(in thousands)
|
|
Balance sheet location
|
|
Carrying value
|
|
Fair value
|
|
|
|
Measured at fair value through comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
Cash and cash equivalents
|
|
$
|
35,009
|
|
|
$
|
35,009
|
|
|
$
|
35,009
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash equivalents
|
|
Funds held for customers
|
|
$
|
7,000
|
|
|
$
|
7,000
|
|
|
$
|
7,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Available-for-sale debt securities
|
|
Funds held for customers
|
|
16,613
|
|
|
16,613
|
|
|
—
|
|
|
16,613
|
|
|
—
|
|
Derivative liability (Note 6)
|
|
Other non-current liabilities
|
|
(8,046)
|
|
|
(8,046)
|
|
|
—
|
|
|
(8,046)
|
|
|
—
|
|
Amortized cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
Cash and cash equivalents
|
|
275,421
|
|
|
275,421
|
|
|
275,421
|
|
|
—
|
|
|
—
|
|
Cash
|
|
Funds held for customers
|
|
82,586
|
|
|
82,586
|
|
|
82,586
|
|
|
—
|
|
|
—
|
|
Loans and notes receivable from Safeguard distributors
|
|
Other current and non-current assets
|
|
41,583
|
|
|
41,261
|
|
|
—
|
|
|
—
|
|
|
41,261
|
|
Long-term debt
|
|
Long-term debt
|
|
1,040,000
|
|
|
1,040,000
|
|
|
—
|
|
|
1,040,000
|
|
|
—
|
|
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
|
|
|
|
December 31, 2019
|
|
Quoted prices in active markets for identical assets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
(in thousands)
|
|
Balance sheet location
|
|
Carrying value
|
|
Fair value
|
|
|
|
Measured at fair value through comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
Cash and cash equivalents
|
|
$
|
9,713
|
|
|
$
|
9,713
|
|
|
$
|
9,713
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash equivalents
|
|
Funds held for customers
|
|
18,000
|
|
|
18,000
|
|
|
18,000
|
|
|
—
|
|
|
—
|
|
Available-for-sale debt securities
|
|
Funds held for customers
|
|
16,450
|
|
|
16,450
|
|
|
—
|
|
|
16,450
|
|
|
—
|
|
Derivative liability (Note 6)
|
|
Other non-current liabilities
|
|
(1,480)
|
|
|
(1,480)
|
|
|
—
|
|
|
(1,480)
|
|
|
—
|
|
Amortized cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
Cash and cash equivalents
|
|
63,907
|
|
|
63,907
|
|
|
63,907
|
|
|
—
|
|
|
—
|
|
Cash
|
|
Funds held for customers
|
|
83,191
|
|
|
83,191
|
|
|
83,191
|
|
|
—
|
|
|
—
|
|
Loans and notes receivable from Safeguard distributors
|
|
Other current and non-current assets
|
|
70,383
|
|
|
68,887
|
|
|
—
|
|
|
—
|
|
|
68,887
|
|
Long-term debt
|
|
Long-term debt
|
|
883,500
|
|
|
883,500
|
|
|
—
|
|
|
883,500
|
|
|
—
|
|
|
|
|
NOTE 8: RESTRUCTURING AND INTEGRATION EXPENSE
|
Restructuring and integration expense consists of costs related to the consolidation and migration of certain applications and processes, including our financial, sales and human resources management systems. It also includes costs related to the integration of acquired businesses into our systems and processes and the rationalization of our real estate footprint. These costs consist primarily of information technology consulting, project management services and internal labor, as well as other miscellaneous costs associated with our initiatives, such as training, travel and relocation. In addition, we recorded employee severance costs related to these initiatives, as well as our ongoing cost reduction initiatives, across functional areas. We are currently pursuing several initiatives designed to focus our business behind our growth strategies and to increase our efficiency. Restructuring and integration expense is not allocated to our reportable business segments.
Restructuring and integration expense is reflected on the consolidated statements of comprehensive income (loss) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Total cost of revenue
|
|
$
|
(26)
|
|
|
$
|
1,419
|
|
|
$
|
831
|
|
|
$
|
2,365
|
|
Operating expenses
|
|
18,949
|
|
|
26,255
|
|
|
56,957
|
|
|
49,089
|
|
Restructuring and integration expense
|
|
$
|
18,923
|
|
|
$
|
27,674
|
|
|
$
|
57,788
|
|
|
$
|
51,454
|
|
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
Restructuring and integration expense for each period was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
External consulting fees
|
|
$
|
14,898
|
|
|
$
|
15,820
|
|
|
$
|
37,136
|
|
|
$
|
28,066
|
|
Employee severance benefits
|
|
752
|
|
|
5,033
|
|
|
10,870
|
|
|
9,794
|
|
Internal labor
|
|
2,218
|
|
|
3,078
|
|
|
5,200
|
|
|
8,927
|
|
Other
|
|
1,055
|
|
|
3,743
|
|
|
4,582
|
|
|
4,667
|
|
Restructuring and integration expense
|
|
$
|
18,923
|
|
|
$
|
27,674
|
|
|
$
|
57,788
|
|
|
$
|
51,454
|
|
Our restructuring and integration accruals represent expected cash payments required to satisfy the remaining severance obligations to those employees already terminated and those expected to be terminated under our various initiatives. These accruals are included in accrued liabilities on the consolidated balance sheets. The majority of the related employee reductions are expected to be completed by the first quarter of 2021, and we expect most of the related severance payments to be paid in the first half of 2021, utilizing cash from operations.
Changes in our restructuring and integration accruals were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Employee severance benefits
|
Balance, December 31, 2019
|
|
$
|
3,459
|
|
Charges
|
|
11,587
|
|
Reversals
|
|
(717)
|
|
Payments
|
|
(11,985)
|
|
Balance, September 30, 2020
|
|
$
|
2,344
|
|
The charges and reversals presented in the rollforward of our restructuring and integration accruals do not include items charged directly to expense as incurred, as those items are not reflected in accrued liabilities on the consolidated balance sheets.
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
|
|
|
NOTE 9: INCOME TAX PROVISION (BENEFIT)
|
The effective tax rate on pre-tax loss reconciles to the U.S. federal statutory tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
Year Ended December 31, 2019
|
Income tax at federal statutory rate
|
|
21.0
|
%
|
|
21.0
|
%
|
Goodwill impairment charges
|
|
(654.9
|
%)
|
|
(29.3
|
%)
|
Net tax impact of share-based compensation
|
|
(105.2
|
%)
|
|
(1.1
|
%)
|
Research and development tax credit
|
|
(3.3
|
%)
|
|
0.6
|
%
|
Change in valuation allowances
|
|
—
|
|
|
(4.5
|
%)
|
Foreign tax rate differences
|
|
4.5
|
%
|
|
1.3
|
%
|
State income tax expense, net of federal income tax benefit
|
|
0.2
|
%
|
|
4.9
|
%
|
Other
|
|
(16.4
|
%)
|
|
(0.6
|
%)
|
Effective tax rate
|
|
(754.1
|
%)
|
|
(7.7
|
%)
|
|
|
|
NOTE 10: POSTRETIREMENT BENEFITS
|
We have historically provided certain health care benefits for a large number of retired U.S. employees. In addition to our retiree health care plan, we also have a U.S. supplemental executive retirement plan. Further information regarding our postretirement benefit plans can be found under the caption “Note 14: Postretirement Benefits” in the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
Postretirement benefit income is included in other income on the consolidated statements of comprehensive income (loss) and consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Interest cost
|
|
$
|
478
|
|
|
$
|
682
|
|
|
$
|
1,434
|
|
|
$
|
2,046
|
|
Expected return on plan assets
|
|
(1,905)
|
|
|
(1,740)
|
|
|
(5,714)
|
|
|
(5,218)
|
|
Amortization of prior service credit
|
|
(355)
|
|
|
(355)
|
|
|
(1,066)
|
|
|
(1,066)
|
|
Amortization of net actuarial losses
|
|
575
|
|
|
806
|
|
|
1,725
|
|
|
2,417
|
|
Net periodic benefit income
|
|
$
|
(1,207)
|
|
|
$
|
(607)
|
|
|
$
|
(3,621)
|
|
|
$
|
(1,821)
|
|
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
Debt outstanding consisted of amounts drawn on our revolving credit facility of $1,040,000 as of September 30, 2020 and $883,500 as of December 31, 2019. In March 2020, in conjunction with our response to the COVID-19 pandemic, we drew an additional $238,000 on our credit facility, due to uncertainty in how the commercial capital and credit markets would operate during the pandemic. During July 2020, we repaid $100,000 of the amount drawn under the credit facility, and in October 2020, we repaid an additional $140,000. As of September 30, 2020, we held cash and cash equivalents of $310,430.
As of September 30, 2020, the total availability under our revolving credit facility was $1,150,000. The facility includes an accordion feature allowing us, subject to lender consent, to increase the credit commitment to an aggregate amount not exceeding $1,425,000. The credit facility matures in March 2023. Our quarterly commitment fee ranges from 0.175% to 0.35%, based on our leverage ratio. Amounts drawn under the credit facility had a weighted-average interest rate of 1.93% as of September 30, 2020 and 3.03% as of December 31, 2019. In July 2019, we executed an interest rate swap to convert $200,000 of the amount drawn under the credit facility to fixed rate debt. Further information can be found in Note 6.
Borrowings under the credit agreement are collateralized by substantially all of our personal and intangible property. The credit agreement governing our credit facility contains customary covenants regarding limits on levels of subsidiary indebtedness and capital expenditures, liens, investments, acquisitions, certain mergers, certain asset sales outside the ordinary course of business, and change in control as defined in the agreement. The agreement also requires us to maintain certain financial ratios, including a maximum leverage ratio of 3.5 and a minimum ratio of consolidated earnings before interest and taxes to consolidated interest expense, as defined in the credit agreement, of 3.0. Additionally, the agreement contains customary representations and warranties including, as a condition to borrowing, that all such representations and warranties are true and correct in all material respects on the date of the borrowing, including representations as to no material adverse change in our business, assets, operations or financial condition.
There are currently no limitations on the amount of dividends and share repurchases under the terms of our credit agreement. However, if our leverage ratio, defined as total debt less unrestricted cash to EBITDA, should exceed 2.75 to 1, there would be an annual limitation on the amount of dividends and share repurchases.
Daily average amounts outstanding under our credit facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Nine Months Ended September 30, 2020
|
|
Year Ended
December 31, 2019
|
Daily average amount outstanding
|
|
$
|
1,042,350
|
|
|
$
|
925,715
|
|
Weighted-average interest rate
|
|
2.17
|
%
|
|
3.54
|
%
|
The following table shows amounts available for borrowing under our revolving credit facility as of September 30, 2020. In October 2020, we repaid $140,000 of the amount drawn on the facility. This amount remains available to us for borrowing.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
available
|
Revolving credit facility commitment
|
|
$
|
1,150,000
|
|
Amount drawn on revolving credit facility
|
|
(1,040,000)
|
|
Outstanding letters of credit(1)
|
|
(7,428)
|
|
Net available for borrowing as of September 30, 2020
|
|
$
|
102,572
|
|
(1) We use standby letters of credit to collateralize certain obligations related primarily to our self-insured workers’ compensation claims, as well as claims for environmental matters, as required by certain states. These letters of credit reduce the amount available for borrowing under our revolving credit facility.
|
|
|
NOTE 12: OTHER COMMITMENTS AND CONTINGENCIES
|
Leases – During the third quarter of 2020, we executed leases on 2 new facilities, located in Georgia and Minnesota, with terms of 6 and 16 years, respectively. As a result, our total lease obligations increased approximately $65,000, with approximately $5,000 due in 2021 - 2022, approximately $13,000 due in 2023 - 2024, and the remainder due through 2037. As these leases have not yet commenced, they are not reflected on our consolidated balance sheet as of September 30, 2020.
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
Indemnifications – In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. These indemnification provisions generally encompass third-party claims arising from our products and services, including, without limitation, service failures, breach of security, intellectual property rights, governmental regulations and/or employment-related matters. Performance under these indemnities would generally be triggered by our breach of the terms of the contract. In disposing of assets or businesses, we often provide representations, warranties and/or indemnities to cover various risks, including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal matters related to periods prior to disposition. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we do not believe that any liability under these indemnities would have a material adverse effect on our financial position, annual results of operations or annual cash flows. We have recorded liabilities for known indemnifications related to environmental matters. These liabilities were not significant as of September 30, 2020 or December 31, 2019.
Self-insurance – We are self-insured for certain costs, primarily workers' compensation claims and medical and dental benefits for active employees and those employees on long-term disability. The liabilities associated with these items represent our best estimate of the ultimate obligations for reported claims plus those incurred, but not reported, and totaled $9,079 as of September 30, 2020 and $7,576 as of December 31, 2019. These accruals are included in accrued liabilities and other non-current liabilities on the consolidated balance sheets. Our workers' compensation liability is recorded at present value. The difference between the discounted and undiscounted liability was not significant as of September 30, 2020 or December 31, 2019.
Our self-insurance liabilities are estimated, in part, by considering historical claims experience, demographic factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future events and claims differ from these assumptions and historical trends.
Litigation – Recorded liabilities for legal matters, as well as related charges recorded in each period, were not material to our financial position, results of operations or liquidity during the periods presented, and we do not believe that any of the currently identified claims or litigation will materially affect our financial position, results of operations or liquidity, upon resolution. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on our financial position, results of operations or liquidity in the period in which the ruling occurs or in future periods.
|
|
|
Note 13: SHAREHOLDERS' EQUITY
|
In October 2018, our board of directors authorized the repurchase of up to $500,000 of our common stock. This authorization has no expiration date. No shares were repurchased during the third quarter of 2020. During the first nine months of 2020, we repurchased 499 thousand shares for $14,000. As of September 30, 2020, $287,452 remained available for repurchase under the authorization.
|
|
|
NOTE 14: BUSINESS SEGMENT INFORMATION
|
For many years, we operated 3 reportable business segments: Small Business Services, Financial Services and Direct Checks. These segments were generally organized by customer type and reflected the way we managed the company. Effective January 1, 2020, we reorganized our reportable business segments to align with structural and management reporting changes in support of our growth strategy. We now operate 4 reportable segments, generally organized by product type, as follows:
•Payments – This segment includes our treasury management solutions, including remittance and lockbox processing, remote deposit capture, receivables management, payment processing and paperless treasury management, in addition to payroll and disbursement services, including Deluxe Payment Exchange and fraud and security services.
•Cloud Solutions – This segment includes web hosting and design services, data-driven marketing solutions and hosted solutions, including digital engagement, logo design, financial institution profitability reporting, account switching tools and business incorporation services.
•Promotional Solutions – This segment includes business forms, accessories, advertising specialties, promotional apparel, retail packaging and strategic sourcing services.
•Checks – This segment includes printed personal and business checks.
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in the 2019 Form 10-K. We allocate corporate costs for our shared services functions to our business segments when the costs are directly attributable to a segment. This includes certain sales and marketing, human resources, supply chain, real estate, finance, information technology and legal costs. Costs that are not directly attributable to a business segment are reported as Corporate operations and consist primarily of marketing, accounting, information technology, facilities, executive management and legal, tax and treasury costs that support the corporate function. Corporate operations also includes other income. All of our segments operate primarily in the U.S., with some operations in Canada. In addition, Cloud Solutions has operations in Australia and portions of Europe, as well as partners in Central and South America.
Under the new segment structure, our chief operating decision maker (i.e., our Chief Executive Officer) reviews earnings before interest, taxes, depreciation and amortization (EBITDA) on an adjusted basis for each segment when deciding how to allocate resources and to assess segment operating performance. Adjusted EBITDA for each segment excludes depreciation and amortization expense, interest expense, income tax expense and certain other amounts, which may include, from time to time: asset impairment charges; restructuring, integration and other costs; CEO transition costs; share-based compensation expense; acquisition transaction costs; certain legal-related expense; and gains or losses on sales of businesses and customer lists. Our Chief Executive Officer does not review segment asset information when making investment or operating decisions regarding our reportable business segments.
The following is our segment information for the quarters and nine months ended September 30, 2020 and 2019. The segment information for 2019 has been revised to reflect our current segment structure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Payments:
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
74,675
|
|
|
$
|
64,634
|
|
|
$
|
223,886
|
|
|
$
|
193,888
|
|
Adjusted EBITDA
|
|
16,746
|
|
|
17,199
|
|
|
50,352
|
|
|
52,037
|
|
Cloud Solutions:
|
|
|
|
|
|
|
|
|
Revenue
|
|
63,758
|
|
|
79,976
|
|
|
193,600
|
|
|
237,178
|
|
Adjusted EBITDA
|
|
16,425
|
|
|
20,216
|
|
|
45,494
|
|
|
56,362
|
|
Promotional Solutions:
|
|
|
|
|
|
|
|
|
Revenue
|
|
124,929
|
|
|
156,835
|
|
|
385,667
|
|
|
468,209
|
|
Adjusted EBITDA
|
|
21,478
|
|
|
22,909
|
|
|
46,529
|
|
|
68,787
|
|
Checks:
|
|
|
|
|
|
|
|
|
Revenue
|
|
176,099
|
|
|
192,148
|
|
|
533,135
|
|
|
587,370
|
|
Adjusted EBITDA
|
|
84,954
|
|
|
98,782
|
|
|
258,392
|
|
|
300,887
|
|
Total segment:
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
439,461
|
|
|
$
|
493,593
|
|
|
$
|
1,336,288
|
|
|
$
|
1,486,645
|
|
Adjusted EBITDA
|
|
139,603
|
|
|
159,106
|
|
|
400,767
|
|
|
478,073
|
|
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
The following table presents a reconciliation of total segment adjusted EBITDA to consolidated income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Total segment adjusted EBITDA
|
|
$
|
139,603
|
|
|
$
|
159,106
|
|
|
$
|
400,767
|
|
|
$
|
478,073
|
|
Corporate operations
|
|
(37,090)
|
|
|
(39,770)
|
|
|
(131,101)
|
|
|
(127,543)
|
|
Depreciation and amortization
|
|
(27,972)
|
|
|
(30,494)
|
|
|
(83,065)
|
|
|
(95,430)
|
|
Interest expense
|
|
(5,083)
|
|
|
(8,710)
|
|
|
(18,254)
|
|
|
(27,251)
|
|
Pre-tax income attributable to non-controlling interest
|
|
21
|
|
|
—
|
|
|
46
|
|
|
—
|
|
Asset impairment charges
|
|
(2,760)
|
|
|
(390,980)
|
|
|
(97,973)
|
|
|
(390,980)
|
|
Restructuring, integration and other costs
|
|
(18,941)
|
|
|
(29,723)
|
|
|
(59,064)
|
|
|
(53,699)
|
|
CEO transition costs(1)
|
|
—
|
|
|
(1,145)
|
|
|
(10)
|
|
|
(8,539)
|
|
Share-based compensation expense
|
|
(6,240)
|
|
|
(5,356)
|
|
|
(15,335)
|
|
|
(14,016)
|
|
Acquisition transaction costs
|
|
—
|
|
|
(13)
|
|
|
(9)
|
|
|
(193)
|
|
Certain legal-related expenses
|
|
—
|
|
|
—
|
|
|
2,165
|
|
|
(6,417)
|
|
Loss on sales of customer lists
|
|
—
|
|
|
(125)
|
|
|
(18)
|
|
|
(224)
|
|
Income (loss) before income taxes
|
|
$
|
41,538
|
|
|
$
|
(347,210)
|
|
|
$
|
(1,851)
|
|
|
$
|
(246,219)
|
|
(1) In 2019, includes adjustments to share-based compensation expense related to the modification of certain awards in conjunction with our CEO transition.
The following tables present revenue disaggregated by our product and service offerings. In conjunction with the realignment of our reportable segments on January 1, 2020, we refined the disaggregation of our revenue by product and service offering. As such, certain amounts reported in the prior year have been revised from previously reported amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2020
|
(in thousands)
|
|
Payments
|
|
Cloud Solutions
|
|
Promotional Solutions
|
|
Checks
|
|
Consolidated
|
Checks
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
176,099
|
|
|
$
|
176,099
|
|
Forms and other products
|
|
—
|
|
|
—
|
|
|
77,492
|
|
|
—
|
|
|
77,492
|
|
Treasury management solutions
|
|
55,418
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
55,418
|
|
Marketing and promotional solutions
|
|
—
|
|
|
—
|
|
|
47,437
|
|
|
—
|
|
|
47,437
|
|
Web and hosted solutions
|
|
—
|
|
|
33,250
|
|
|
—
|
|
|
—
|
|
|
33,250
|
|
Data-driven marketing solutions
|
|
—
|
|
|
30,508
|
|
|
—
|
|
|
—
|
|
|
30,508
|
|
Other payments solutions
|
|
19,257
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,257
|
|
Total revenue
|
|
$
|
74,675
|
|
|
$
|
63,758
|
|
|
$
|
124,929
|
|
|
$
|
176,099
|
|
|
$
|
439,461
|
|
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2019
|
(in thousands)
|
|
Payments
|
|
Cloud Solutions
|
|
Promotional Solutions
|
|
Checks
|
|
Consolidated
|
Checks
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
192,148
|
|
|
$
|
192,148
|
|
Forms and other products
|
|
—
|
|
|
—
|
|
|
86,184
|
|
|
—
|
|
|
86,184
|
|
Treasury management solutions
|
|
45,836
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45,836
|
|
Marketing and promotional solutions
|
|
—
|
|
|
—
|
|
|
70,651
|
|
|
—
|
|
|
70,651
|
|
Web and hosted solutions
|
|
—
|
|
|
38,892
|
|
|
—
|
|
|
—
|
|
|
38,892
|
|
Data-driven marketing solutions
|
|
—
|
|
|
41,084
|
|
|
—
|
|
|
—
|
|
|
41,084
|
|
Other payments solutions
|
|
18,798
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,798
|
|
Total revenue
|
|
$
|
64,634
|
|
|
$
|
79,976
|
|
|
$
|
156,835
|
|
|
$
|
192,148
|
|
|
$
|
493,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
(in thousands)
|
|
Payments
|
|
Cloud Solutions
|
|
Promotional Solutions
|
|
Checks
|
|
Consolidated
|
Checks
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
533,135
|
|
|
$
|
533,135
|
|
Forms and other products
|
|
—
|
|
|
—
|
|
|
234,735
|
|
|
—
|
|
|
234,735
|
|
Treasury management solutions
|
|
167,078
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
167,078
|
|
Marketing and promotional solutions
|
|
—
|
|
|
—
|
|
|
150,932
|
|
|
—
|
|
|
150,932
|
|
Web and hosted solutions
|
|
—
|
|
|
104,673
|
|
|
—
|
|
|
—
|
|
|
104,673
|
|
Data-driven marketing solutions
|
|
—
|
|
|
88,927
|
|
|
—
|
|
|
—
|
|
|
88,927
|
|
Other payments solutions
|
|
56,808
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56,808
|
|
Total revenue
|
|
$
|
223,886
|
|
|
$
|
193,600
|
|
|
$
|
385,667
|
|
|
$
|
533,135
|
|
|
$
|
1,336,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
(in thousands)
|
|
Payments
|
|
Cloud Solutions
|
|
Promotional Solutions
|
|
Checks
|
|
Consolidated
|
Checks
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
587,370
|
|
|
$
|
587,370
|
|
Forms and other products
|
|
—
|
|
|
—
|
|
|
257,553
|
|
|
—
|
|
|
257,553
|
|
Treasury management solutions
|
|
136,782
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
136,782
|
|
Marketing and promotional solutions
|
|
—
|
|
|
—
|
|
|
210,656
|
|
|
—
|
|
|
210,656
|
|
Web and hosted solutions
|
|
—
|
|
|
120,514
|
|
|
—
|
|
|
—
|
|
|
120,514
|
|
Data-driven marketing solutions
|
|
—
|
|
|
116,664
|
|
|
—
|
|
|
—
|
|
|
116,664
|
|
Other payments solutions
|
|
57,106
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57,106
|
|
Total revenue
|
|
$
|
193,888
|
|
|
$
|
237,178
|
|
|
$
|
468,209
|
|
|
$
|
587,370
|
|
|
$
|
1,486,645
|
|
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
The following tables present revenue disaggregated by geography, based on where items are shipped from or where services are performed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2020
|
(in thousands)
|
|
Payments
|
|
Cloud Solutions
|
|
Promotional Solutions
|
|
Checks
|
|
Consolidated
|
United States
|
|
$
|
66,377
|
|
|
$
|
55,755
|
|
|
$
|
118,454
|
|
|
$
|
170,865
|
|
|
$
|
411,451
|
|
Foreign, primarily Canada and Australia
|
|
8,298
|
|
|
8,003
|
|
|
6,475
|
|
|
5,234
|
|
|
28,010
|
|
Total revenue
|
|
$
|
74,675
|
|
|
$
|
63,758
|
|
|
$
|
124,929
|
|
|
$
|
176,099
|
|
|
$
|
439,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2019
|
(in thousands)
|
|
Payments
|
|
Cloud Solutions
|
|
Promotional Solutions
|
|
Checks
|
|
Consolidated
|
United States
|
|
$
|
56,088
|
|
|
$
|
71,300
|
|
|
$
|
150,336
|
|
|
$
|
186,659
|
|
|
$
|
464,383
|
|
Foreign, primarily Canada and Australia
|
|
8,546
|
|
|
8,676
|
|
|
6,499
|
|
|
5,489
|
|
|
29,210
|
|
Total revenue
|
|
$
|
64,634
|
|
|
$
|
79,976
|
|
|
$
|
156,835
|
|
|
$
|
192,148
|
|
|
$
|
493,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
(in thousands)
|
|
Payments
|
|
Cloud Solutions
|
|
Promotional Solutions
|
|
Checks
|
|
Consolidated
|
United States
|
|
$
|
198,965
|
|
|
$
|
169,917
|
|
|
$
|
369,023
|
|
|
$
|
516,961
|
|
|
$
|
1,254,866
|
|
Foreign, primarily Canada and Australia
|
|
24,921
|
|
|
23,683
|
|
|
16,644
|
|
|
16,174
|
|
|
81,422
|
|
Total revenue
|
|
$
|
223,886
|
|
|
$
|
193,600
|
|
|
$
|
385,667
|
|
|
$
|
533,135
|
|
|
$
|
1,336,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
(in thousands)
|
|
Payments
|
|
Cloud Solutions
|
|
Promotional Solutions
|
|
Checks
|
|
Consolidated
|
United States
|
|
$
|
169,130
|
|
|
$
|
210,929
|
|
|
$
|
448,049
|
|
|
$
|
570,565
|
|
|
$
|
1,398,673
|
|
Foreign, primarily Canada and Australia
|
|
24,758
|
|
|
26,249
|
|
|
20,160
|
|
|
16,805
|
|
|
87,972
|
|
Total revenue
|
|
$
|
193,888
|
|
|
$
|
237,178
|
|
|
$
|
468,209
|
|
|
$
|
587,370
|
|
|
$
|
1,486,645
|
|
|
|
|
NOTE 15: RISKS AND UNCERTAINTIES
|
The impact on our business of the COVID-19 pandemic continues to evolve. As such, we are uncertain of the impact on our future financial condition, liquidity and/or results of operations. This uncertainty affected several of the assumptions made and estimates used in the preparation of these consolidated financial statements. As discussed in Note 7, the COVID-19 pandemic resulted in a goodwill impairment triggering event during the first quarter of 2020, as the adverse economic effects of the pandemic materially decreased demand for the products and services we provide to our customers, particularly through our Promotional Solutions and Cloud Solutions segments. The extent to which the pandemic will continue to impact our business depends on future developments, including the severity and duration of the pandemic, business and workforce disruptions and the ultimate number of businesses that fail. Our evaluation of asset impairment required us to make assumptions about these future events over the life of the assets being evaluated. This required significant judgment and actual results may differ significantly from our estimates. As a result of the continuing effects of COVID-19, we may be required to record additional goodwill or other asset impairment charges in the future.
We held loans and notes receivable from our Safeguard distributors of $41,583 as of September 30, 2020. These distributors sell their products and services primarily to small businesses, which have been significantly impacted by the COVID-19 pandemic. As of September 30, 2020, our allowance for expected credit losses on these receivables was $4,278, although the majority of this amount was not driven by impacts of the pandemic. We utilized all information known to us in determining this allowance, as well as allowances related to our trade accounts receivable and unbilled receivables. If our assumptions prove to be incorrect, we may be required to record additional bad debt expense in the future. Additionally,
|
|
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
uncertainty surrounding the impact of the COVID-19 outbreak could affect estimates we made regarding inventory obsolescence and workers' compensation liabilities and thus, could result in additional expense in the future.
|
|
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:
•Executive Overview that discusses what we do, our operating results at a high level and our financial outlook for the upcoming year;
•Consolidated Results of Operations; Restructuring, Integration and Other Costs; and Segment Results that includes a more detailed discussion of our revenue and expenses;
•Cash Flows and Liquidity, Capital Resources and Other Financial Position Information that discusses key aspects of our cash flows, capital structure and financial position;
•Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations that discusses our financial commitments; and
•Critical Accounting Policies that discusses the policies we believe are most important to understanding the assumptions and judgments underlying our financial statements.
Please note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 (the 2019 Form 10-K) outlines known material risks and important information to consider when evaluating our forward-looking statements and is incorporated into this Item 2 of this report on Form 10-Q as if fully stated herein. Updates to the risk factors discussed in the 2019 Form 10-K are included in Part II, Item 1A of this report on Form 10-Q. The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. When we use the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” “outlook,” "forecast" or similar expressions in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission, in our press releases, investor presentations and in oral statements made by our representatives, they indicate forward-looking statements within the meaning of the Reform Act.
This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). In addition, we discuss free cash flow, net debt, adjusted diluted earnings per share (EPS) and consolidated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), all of which are non-GAAP financial measures. We believe that these non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide useful information to assist investors in analyzing our current period operating performance and in assessing our future period operating performance. For this reason, our internal management reporting also includes these financial measures, which should be considered in addition to, and not as superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and therefore, may not result in useful comparisons. The reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Consolidated Results of Operations.
Realignment – For many years, we operated 3 reportable business segments: Small Business Services, Financial Services and Direct Checks. These segments were generally organized by customer type and reflected the way we managed the company. Effective January 1, 2020, we reorganized our reportable business segments to align with structural and management reporting changes in support of our growth strategy. We now operate 4 reportable segments: Payments, Cloud Solutions, Promotional Solutions and Checks. These segments are generally organized by product type and reflect the way we currently manage the company. Further information regarding our segments and our product and service offerings can be found under the caption "Note 14: Business Segment Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
COVID-19 impact on 2020 results – The COVID-19 pandemic began to impact our operations late in the first quarter of 2020. Total revenue for the second quarter of 2020 declined 16.9%, as compared to the second quarter of 2019, and total revenue for the third quarter of 2020 declined 11.0%, as compared to the third quarter of 2019. While revenue in both periods benefited from sales-driven growth, it was not sufficient to overcome the impact of COVID-19. The pandemic primarily impacted revenue volumes in our Promotional Solutions, Checks and Cloud Solutions segments. Within Promotional Solutions, many of
our business customers have been significantly impacted by their customers' and governmental responses to the pandemic. Demand for promotional products declined, as our customers reduced or stopped virtually all promotional activities when they were forced to close, and many of their operations are still limited. The decline in travel and event cancellations also reduced promotional spending. In Checks, we have seen a decline in business checks resulting from the slowdown in the economy stemming from government-mandated shutdowns and limitations. Personal check volumes also slowed at a somewhat lesser rate. The impact in Cloud Solutions has been primarily driven by a decline in data-driven marketing solutions, as clients suspended their marketing campaigns during this period of uncertainty. Partially offsetting the volume declines was new revenue of $29.5 million during the first nine months of 2020 from sales of personal protective equipment (PPE) in our Promotional Solutions segment.
The impact of COVID-19 on our revenue was most severe in April. It began to improve throughout the remainder of the second quarter and through third quarter, as well. Adjusted EBITDA margin was 23.3% for the third quarter of 2020, an increase of 290 basis points over the second quarter of 2020, and better than our annual expectations prior to the pandemic. To bolster our liquidity, we drew an additional $238.0 million on our $1.15 billion revolving credit facility in March 2020 and we suspended share repurchases in both the second and third quarters. We also took steps to reduce discretionary spending and other expenditures in line with our revenue declines. These steps included temporary salary reductions for all salaried employees, including our leadership team and board of directors, project delays, furloughs and other actions. We also delayed U.S. federal payroll tax payments under the Coronavirus Aid, Relief and Economic Security (CARES) Act. As a result of these actions and our stronger than expected performance, free cash flow for the first nine months of 2020 was $124.1 million, compared to $158.3 million for the first nine months of 2019, and net debt as of September 30, 2020 was the lowest since June 30, 2018. As a result of our strong cash flow, we were able to end the temporary salary reductions, effective July 1, 2020. We also repaid $100.0 million of the amount drawn on our revolving credit facility during July 2020, and we repaid an additional $140.0 million in October 2020. Our priority is to maintain our financial strength, while simultaneously continuing our business transformation. While we reduced some expenditures during the first half of 2020, we have decided to selectively resume certain capital projects and to continue important systems implementation work, including our enterprise resource planning and sales technology implementations. Also, we paid our regular quarterly dividend of $0.30 per share in both June and September 2020.
We continue to monitor the impact of COVID-19 on all aspects of our business, including our operations, suppliers, customers, industry and workforce. We are keeping 2 primary goals in mind: (1) protecting employees, customers and their respective families and (2) continuing to serve the customers who rely on us. The situation surrounding COVID-19 remains fluid, and the potential for additional negative impacts on our results of operations, financial condition and/or liquidity increases the longer the virus impacts activity levels in the U.S. and the other countries in which we operate. During the first quarter of 2020, we successfully activated our business continuity plan to ensure uninterrupted operations and services. We have not experienced any significant interruptions in our supply chain to-date, and we currently do not expect significant future interruptions. Many of our facilities remain open, employees who have the ability to work from home continue to do so and the success of our work-from-home model allowed us to accelerate certain site closures.
2020 results vs. 2019 – Numerous factors drove the decrease in net loss for the first nine months of 2020, as compared to the first nine months of 2019. Factors that decreased net loss included:
•a decrease in pre-tax asset impairment charges of $293.0 million, as compared to 2019;
•actions taken to reduce costs in line with reduced revenues and the continuing evaluation of our cost structure, including savings of approximately $25.0 million from the temporary salary reductions, suspension of the 401(k) plan employer matching contribution, discretionary spending reductions and furloughs;
•revenue growth, including increased treasury management revenue, increases in certain data-driven marketing campaigns in the first quarter of 2020 prior to the commencement of the impact of the COVID-19 pandemic, and new revenue from sales of PPE in 2020;
•a decrease in acquisition amortization of $12.2 million, driven in part by previous asset impairment charges;
•a decrease in certain legal-related expenses of $8.6 million; and
•the absence of non-recurring CEO transition costs in 2020, as compared to $8.5 million in 2019.
Partially offsetting these decreases in net loss were the following factors:
•the loss of revenue resulting from the impact of the COVID-19 pandemic;
•various investments of approximately $35.0 million to advance our One Deluxe strategy, including costs related to treasury management deals signed in the fourth quarter of 2019 and various information technology, sales, finance and human capital investments;
•the continuing secular decline in checks and forms, the loss of web hosting revenue in the third quarter of 2019 and the decision to exit certain product lines within Cloud Solutions;
•incremental costs of approximately $7.0 million resulting from our response to COVID-19, including a Hero Pay premium provided to employees working on-site during the second quarter of 2020, costs related to enabling employees to work from home and additional facility cleaning costs;
•a $5.6 million increase in bad debt expense in 2020 related to notes receivable from our Safeguard distributors;
•a $5.4 million increase in restructuring, integration and other costs in support of our strategy and to increase our efficiency; and
•the change in our effective income tax rate, as compared to the prior year.
Diluted loss per share of $0.40 for the first nine months of 2020, as compared to diluted loss per share of $5.65 for the first nine months of 2019, reflects the lower net loss as described in the preceding paragraphs, as well as lower average shares outstanding in 2020. Adjusted diluted EPS for the first nine months of 2020 was $3.70, compared to $4.88 for the first nine months of 2019, and excludes the impact of non-cash items or items that we believe are not indicative of ongoing operations. A reconciliation of diluted earnings (loss) per share to adjusted diluted EPS can be found in Consolidated Results of Operations.
Asset impairment charges – Net loss for the first nine months of 2020 included pre-tax asset impairment charges of $98.0 million, or $1.45 per share. The impairment charges related primarily to the goodwill of our Promotional Solutions and Cloud Solutions Web Hosting reporting units, as well as certain intangibles in our Cloud Solutions Web Hosting reporting unit. Net loss for the first nine months of 2019 included pre-tax asset impairment charges of $391.0 million, or $7.92 per share. The impairment charges related to the goodwill of our former Small Business Services Web Services and Financial Services Data-Driven Marketing reporting units, as well as certain intangibles, primarily in our former Small Business Services Web Services reporting unit. Further information regarding these impairment charges can be found under the caption "Note 7: Fair Value Measurements" of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report and under the caption "Note 8: Fair Value Measurements" in the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
"One Deluxe" Strategy
A detailed discussion of our strategy can be found in Part I, Item 1 of the 2019 Form 10-K. In support of our strategy, we are investing significant resources to build out our technology platforms. We completed the implementation of a human capital management system in January 2020. We also are investing in sales technology that enables a single view of our customers, thereby providing for deeper cross-sell opportunities. In addition, we are investing in our financial tools, including an enterprise resource planning system and a financial planning and analysis system. Strategically, we believe these enhancements will allow us to better assess and manage our business at the total company level and will make it easier for us to quickly integrate future acquisitions. While we reduced certain expenditures at the onset of the COVID-19 pandemic, we have since decided to continue important systems implementation work and we are continuing to invest in these initiatives.
Effective January 1, 2020, we began managing the company based on our product and service offerings, focusing on our 4 new business segments: Payments, Cloud Solutions, Promotional Solutions and Checks. We expect to reinvest free cash flow into the 2 segments we view as our primary platforms for growth: Payments and Cloud Solutions. Realignments such as this take time, considerable senior management effort, material "buy-in" from employees and significant investment. We continue to make progress on our transformation and many of our investments are beginning to deliver positive results. During the first 2 months of 2020, prior to the COVID-19 pandemic, we were on track to deliver consolidated sales-driven revenue growth. Even during the pandemic, treasury management revenue grew over 22% for the first nine months of 2020, as compared to 2019. Despite the pandemic, we continue to execute new sales contracts, renew existing sales contracts and drive successful tele-sales efforts. We were able to quickly enter the PPE market and generated revenue of approximately $29.5 million in our Promotional Solutions segment during the first nine months of 2020. We continue to drive new market share wins across our segments, cross-sell our solutions to existing customers, and enhance our distribution channels. While still in the midst of our transformation, we are finding that our new One Deluxe structure is able to quickly respond to our customers' needs and drive profitable revenue growth.
Outlook for 2020
Due to the continuing uncertainties surrounding the current business environment and a second wave of COVID-19 during the fourth quarter of 2020, we are not providing detailed financial guidance at this time. We expect revenue for the fourth quarter of 2020 to be softer than the third quarter of 2020 on a year-over-year percentage basis, due to expected customer implemention delays in treasury management and data-driven marketing, which may be attributable to the COVID-19 pandemic. This will be
most evident in Payments, where we expect a temporary slowing of double-digit revenue growth to low- to mid-single digit growth. We also decided to divest several product lines in Cloud Solutions and that, combined with a second wave of COVID-19, will impact fourth quarter revenue. In Checks, we believe the secular decline in volume sequentially improved during the third quarter of 2020, likely benefiting from some delayed second quarter volume. We expect the revenue recovery to be slightly lower in the fourth quarter of 2020, as compared to the third quarter, and we expect check volumes to return to traditional secular trends with the overall recovery in the economy. Despite these challenges, we anticipate that our consolidated adjusted EBITDA margin for the fourth quarter of 2020 will remain at our long-term target of 20% or better.
In response to the pandemic, we took actions to manage expenses in line with revenue declines, including temporary salary reductions for all salaried employees, including our leadership team and board of directors, project delays, furloughs and other actions. Based on our second quarter results, we ended the temporary salary reductions, effective July 1, 2020. Furloughs continue in certain facilities that lack product demand to remain open. In late June, we exited approximately 250 employees, as we continue to develop our post-COVID-19 operating model to match our expected future volumes and to gain efficiencies. Also during the second and third quarters of 2020, we announced plans to lower future operating expenses through further site consolidation, including relocating existing sites in Minnesota and Georgia. We made the decision to close over 30 facilities, some of which have already been closed, with the remainder expected to be closed through 2021. These facilities contain primarily sales and administrative functions, and most of the impacted employees will convert to a work-from-home model. We anticipate annual operating expense savings of more than $10.0 million from these facility closures, once they are complete.
We held cash and cash equivalents of $310.4 million as of September 30, 2020. In July 2020, we repaid $100.0 million of the amount drawn on our revolving credit facility, and in October 2020, we repaid an additional $140.0 million. These amounts remain available to us for borrowing, with $900.0 million drawn on the facility after these repayments. Our credit facility includes an accordion feature allowing us, subject to lender consent, to expand the facility to $1.425 billion. We anticipate that we will continue to pay our regular quarterly dividend. However, dividends are approved by our board of directors each quarter and thus, are subject to change. We anticipate that net cash generated by operations, along with the cash and cash equivalents on hand and availability under our credit facility, will be sufficient to support our operations and to meet our financial commitments for the next 12 months. We were in compliance with our debt covenants as of September 30, 2020, and we anticipate that we will remain in compliance with our debt covenants throughout the next 12 months.