10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 5, 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
||
For the quarterly period ended |
|||
[ ] |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________________________ to ________________________
|
||
Commission file number: 1-7945
DELUXE CORPORATION
(Exact name of registrant as specified in its charter)
|
Minnesota
(State or other jurisdiction of incorporation or organization)
|
41-0216800
(I.R.S. Employer Identification No.)
|
|
3680 Victoria St. N., Shoreview, Minnesota
(Address of principal executive offices)
|
55126-2966
(Zip Code)
|
(651) 483-7111
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] |
Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
|
Smaller reporting company [ ] |
Emerging growth company [ ] |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The number of shares outstanding of registrant’s common stock, par value $1.00 per share, at April 20, 2017 was 48,501,363 .
1
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value)
(Unaudited)
March 31, 2017 |
December 31, 2016 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ |
$ |
||||||
Trade accounts receivable (net of allowances for uncollectible accounts of $2,886 and $2,828, respectively) |
||||||||
Inventories and supplies |
||||||||
Funds held for customers |
||||||||
Other current assets |
||||||||
Total current assets |
||||||||
Deferred income taxes |
||||||||
Long-term investments (including $1,670 and $1,877 of investments at fair value, respectively) |
||||||||
Property, plant and equipment (net of accumulated depreciation of $349,329 and $349,249, respectively) |
||||||||
Assets held for sale |
||||||||
Intangibles (net of accumulated amortization of $458,682 and $435,756, respectively) |
||||||||
Goodwill |
||||||||
Other non-current assets |
||||||||
Total assets |
$ |
$ |
||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ |
$ |
||||||
Accrued liabilities |
||||||||
Long-term debt due within one year |
||||||||
Total current liabilities |
||||||||
Long-term debt |
||||||||
Deferred income taxes |
||||||||
Other non-current liabilities |
||||||||
Commitments and contingencies (Notes 11 and 12) |
||||||||
Common shares $1 par value (authorized: 500,000 shares; outstanding: March 31, 2017 – 48,502; December 31, 2016 – 48,546) |
||||||||
Retained earnings |
||||||||
Accumulated other comprehensive loss |
( |
) |
( |
) |
||||
Total shareholders’ equity |
||||||||
Total liabilities and shareholders’ equity |
$ |
$ |
||||||
See Condensed Notes to Unaudited Consolidated Financial Statements
2
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(Unaudited)
Quarter Ended March 31, |
||||||||
2017 |
2016 |
|||||||
Product revenue |
$ |
$ |
||||||
Service revenue |
||||||||
Total revenue |
||||||||
Cost of products |
( |
) |
( |
) |
||||
Cost of services |
( |
) |
( |
) |
||||
Total cost of revenue |
( |
) |
( |
) |
||||
Gross profit |
||||||||
Selling, general and administrative expense |
( |
) |
( |
) |
||||
Net restructuring charges |
( |
) |
( |
) |
||||
Asset impairment charge |
( |
) |
||||||
Operating income |
||||||||
Interest expense |
( |
) |
( |
) |
||||
Other income |
||||||||
Income before income taxes |
||||||||
Income tax provision |
( |
) |
( |
) |
||||
Net income |
$ |
$ |
||||||
Comprehensive income |
$ |
$ |
||||||
Basic earnings per share |
||||||||
Diluted earnings per share |
||||||||
Cash dividends per share |
||||||||
See Condensed Notes to Unaudited Consolidated Financial Statements
3
DELUXE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
Common shares |
Common shares
par value
|
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive loss |
Total |
||||||||||||||||||
Balance, December 31, 2016 |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||
Net income |
— |
||||||||||||||||||||||
Cash dividends |
— |
( |
) |
( |
) |
||||||||||||||||||
Common shares issued |
|||||||||||||||||||||||
Common shares repurchased |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||||||||
Other common shares retired |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||||||||||
Fair value of share-based compensation |
— |
||||||||||||||||||||||
Other comprehensive income |
— |
||||||||||||||||||||||
Balance, March 31, 2017 |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||
See Condensed Notes to Unaudited Consolidated Financial Statements
4
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Quarter Ended March 31, |
||||||||||
2017 |
2016 |
|||||||||
Cash flows from operating activities: |
||||||||||
Net income |
$ |
$ |
||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||
Depreciation |
||||||||||
Amortization of intangibles |
||||||||||
Asset impairment charge |
||||||||||
Amortization of contract acquisition costs |
||||||||||
Deferred income taxes |
( |
) |
( |
) |
||||||
Employee share-based compensation expense |
||||||||||
Other non-cash items, net |
( |
) |
||||||||
Changes in assets and liabilities, net of effect of acquisitions: |
||||||||||
Trade accounts receivable |
||||||||||
Inventories and supplies |
( |
) |
||||||||
Other current assets |
( |
) |
||||||||
Non-current assets |
( |
) |
( |
) |
||||||
Accounts payable |
( |
) |
( |
) |
||||||
Contract acquisition payments |
( |
) |
( |
) |
||||||
Other accrued and non-current liabilities |
( |
) |
( |
) |
||||||
Net cash provided by operating activities |
||||||||||
Cash flows from investing activities: |
||||||||||
Purchases of capital assets |
( |
) |
( |
) |
||||||
Payments for acquisitions, net of cash acquired |
( |
) |
( |
) |
||||||
Other |
( |
) |
||||||||
Net cash used by investing activities |
( |
) |
( |
) |
||||||
Cash flows from financing activities: |
||||||||||
Proceeds from issuing long-term debt |
||||||||||
Payments on long-term debt |
( |
) |
( |
) |
||||||
Proceeds from issuing shares under employee plans |
||||||||||
Employee taxes paid for shares withheld |
( |
) |
( |
) |
||||||
Payments for common shares repurchased |
( |
) |
( |
) |
||||||
Cash dividends paid to shareholders |
( |
) |
( |
) |
||||||
Other |
( |
) |
( |
) |
||||||
Net cash used by financing activities |
( |
) |
( |
) |
||||||
Effect of exchange rate change on cash |
||||||||||
Net change in cash and cash equivalents |
||||||||||
Cash and cash equivalents, beginning of year |
||||||||||
Cash and cash equivalents, end of period |
$ |
$ |
||||||||
See Condensed Notes to Unaudited Consolidated Financial Statements
5
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 1: Consolidated financial statements
The consolidated balance sheet as of March 31, 2017, the consolidated statements of comprehensive income for the quarters ended March 31, 2017 and 2016, the consolidated statement of shareholders’ equity for the quarter ended March 31, 2017, and the consolidated statements of cash flows for the quarters ended March 31, 2017 and 2016 are unaudited. The consolidated balance sheet as of December 31, 2016 was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles (GAAP) in the United States of America. 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, 2016 (the “2016 Form 10-K”).
We assessed the materiality of this error on prior periods' financial statements in accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements. We concluded that the error was not material to any prior annual or interim period and therefore, amendments of previously filed reports were not required. In accordance with ASC 250, we have corrected the error for all prior periods presented by revising the consolidated financial statements appearing herein. The revisions had no impact on total assets, total liabilities, shareholders' equity, net income or net cash used by financing activities.
The impact of this revision on our unaudited consolidated statement of cash flows for the quarter ended March 31, 2016 was as follows:
Quarter Ended March 31, 2016 |
||||||||||||
(in thousands) |
As Previously Reported |
Adjustment |
As Revised |
|||||||||
Payments on short-term borrowings |
$ |
( |
) |
$ |
$ |
|||||||
Proceeds from issuing long-term debt |
||||||||||||
Payments on long-term debt |
( |
) |
( |
) |
( |
) |
||||||
Note 2: New accounting pronouncements
Recently adopted accounting pronouncements – In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-04, Simplifying the Test for Goodwill Impairment. The standard removes Step 2 of the goodwill impairment test, which requires a company to perform procedures to determine the fair value of a reporting unit's assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, a goodwill impairment charge will now be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We elected to early adopt this standard on January 1, 2017. As we have not been required to complete Step 2 of the goodwill impairment test for several years, we do not anticipate that this standard will have an impact on our consolidated financial statements.
Accounting pronouncements not yet adopted – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard provides revenue recognition guidance for any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets, unless those contracts are
6
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
within the scope of other accounting standards. The standard also expands the required financial statement disclosures regarding revenue recognition. In addition, in March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), in April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, and in May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients. These standards are intended to clarify aspects of ASU No. 2014-09 and are effective for us upon adoption of ASU No. 2014-09. The new guidance is effective for us on January 1, 2018. We are currently in the process of analyzing each of our revenue streams in accordance with the new guidance. We have completed the evaluation of our Direct Checks revenue streams and we do not expect the application of these standards to those revenue streams to have a material impact on our results of operations or financial position. We continue to make progress in our evaluation of the impact of the new standards on our Small Business Services and Financial Services revenue streams. We currently anticipate that we will adopt the standards using the modified retrospective method. This method requires the standard to be applied to existing and future contracts as of the effective date, with an adjustment to opening retained earnings in the year of adoption for the cumulative effect of the change. In addition, we will disclose the amount by which each financial statement line item is affected in the current reporting period by the application of the new guidance as compared with the guidance that was in effect before the change.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The standard is intended to improve the recognition, measurement, presentation and disclosure of financial instruments. The guidance is effective for us on January 1, 2018. We do not expect the application of this standard to have a significant impact on our results of operations or financial position.
In February 2016, the FASB issued ASU No. 2016-02, Leasing. The standard is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities for virtually all leases and by requiring the disclosure of key information about leasing arrangements. The guidance is effective for us on January 1, 2019, and requires adoption using a modified retrospective approach. We are currently assessing the impact of this standard on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The standard introduces new guidance for the accounting for credit losses on instruments within its scope, including trade and loans receivable and available-for-sale debt securities. The guidance is effective for us on January 1, 2020 and requires adoption using a 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.
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The standard requires recognition of the tax effects resulting from the intercompany sale of an asset when the transfer occurs. Previously, the tax effects were deferred until the transferred asset was sold to a third party. The guidance is effective for us on January 1, 2018 and requires adoption using a modified retrospective approach. We are currently assessing the impact of this standard on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The standard revises the
definition of a business, which affects many areas of accounting such as business combinations and disposals and goodwill impairment. The revised definition of a business will likely result in more acquisitions being accounted for as asset acquisitions, as opposed to business combinations. The guidance is effective for us on January 1, 2018 and is required to be applied prospectively to transactions occurring on or after the effective date.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that the service cost component of net periodic benefit expense be recognized in the same income statement caption(s) as other compensation costs, and requires that the other components of net periodic benefit expense be recognized in the non-operating section of the statement of income. In addition, only the service cost component of net periodic benefit expense is eligible for capitalization when applicable. The guidance is effective for us on January 1, 2018. The reclassification of the other components of net periodic benefit expense will be applied on a retrospective basis. As we will use the practical expedient for adoption outlined in the standard, net periodic benefit income of $2,016 for 2017, $1,841 for 2016 and $2,697 for 2015 will be reclassified from total cost of revenue and selling, general and administrative (SG&A) expense to other income in our consolidated statements of comprehensive income. This represents the entire amount of our net periodic benefit income as there is no service cost associated with our plans. The guidance allowing
7
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
only the service cost component of net periodic benefit expense to be capitalized will be adopted on a prospective basis. We do not expect this change to have a significant impact on our consolidated financial statements.
Note 3: Supplemental balance sheet information
(in thousands) |
March 31, 2017 |
December 31, 2016 |
||||||
Raw materials |
$ |
$ |
||||||
Semi-finished goods |
||||||||
Finished goods |
||||||||
Supplies |
||||||||
Inventories and supplies |
$ |
$ |
||||||
March 31, 2017 |
||||||||||||||||
(in thousands) |
Cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
||||||||||||
Funds held for customers:(1)
|
||||||||||||||||
Domestic money market fund |
$ |
$ |
$ |
$ |
||||||||||||
Canadian and provincial government securities |
( |
) |
||||||||||||||
Canadian guaranteed investment certificates |
||||||||||||||||
Available-for-sale securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
(1) Funds held for customers, as reported on the consolidated balance sheet as of March 31, 2017, also included cash of $66,485 .
December 31, 2016 |
||||||||||||||||
(in thousands) |
Cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
||||||||||||
Funds held for customers:(1)
|
||||||||||||||||
Domestic money market fund |
$ |
$ |
$ |
|||||||||||||
Canadian and provincial government securities |
( |
) |
||||||||||||||
Canadian guaranteed investment certificates |
||||||||||||||||
Available-for-sale securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
(in thousands) |
Fair value |
|||
Due in one year or less |
$ |
|||
Due in two to five years |
||||
Due in six to ten years |
||||
Available-for-sale securities |
$ |
|||
Further information regarding the fair value of available-for-sale securities can be found in Note 7.
8
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Assets held for sale – Assets held for sale as of March 31, 2017 included the operations of 2 small business distributors. Assets held for sale as of December 31, 2016 included the operations of a small business distributor and a provider of printed and promotional products that was sold during the quarter ended March 31, 2017. Also during the quarter ended March 31, 2017, we sold the operations of an additional small business distributor that previously did not meet the requirements to be reported as assets held for sale in the consolidated balance sheets. We determined that these businesses would be better positioned for long-term growth if they were managed independently. Subsequent to the sales, these businesses are owned by independent distributors that are part of our Safeguard® distributor network. As such, our revenue will not be impacted by these sales and the impact to our costs is not significant. We entered into notes receivable in conjunction with these sales and we recognized an aggregate net gain of $6,779 , which is included in SG&A expense in the consolidated statement of comprehensive income for the quarter ended March 31, 2017.
The businesses sold, as well as those held for sale as of March 31, 2017, were included in our Small Business Services segment and the assets consisted primarily of intangible assets. During the quarter ended March 31, 2017, we recorded a pre-tax asset impairment charge of $5,296 related to one of the small business distributors held for sale. The impairment charge reduced the carrying value of the business to its estimated fair value less costs to sell, based on on-going negotiations for the sale of the business, including multiple offers. We are actively marketing the remaining businesses held for sale and we expect the selling prices will equal or exceed their current carrying values. Net assets held for sale consisted of the following:
(in thousands) |
March 31, 2017 |
December 31, 2016 |
Balance sheet caption |
|||||||
Current assets |
$ |
$ |
Other current assets |
|||||||
Intangibles |
Assets held for sale |
|||||||||
Goodwill |
Assets held for sale |
|||||||||
Other non-current assets |
Assets held for sale |
|||||||||
Accrued liabilities |
( |
) |
( |
) |
Accrued liabilities |
|||||
Deferred income tax liabilities |
( |
) |
( |
) |
Other non-current liabilities |
|||||
Net assets held for sale |
$ |
$ |
||||||||
March 31, 2017 |
December 31, 2016 |
|||||||||||||||||||||||
(in thousands) |
Gross carrying amount |
Accumulated amortization |
Net carrying amount |
Gross carrying amount |
Accumulated amortization |
Net carrying amount |
||||||||||||||||||
Indefinite-lived intangibles: |
||||||||||||||||||||||||
Trade name |
$ |
$ |
— |
$ |
$ |
$ |
— |
$ |
||||||||||||||||
Amortizable intangibles: |
||||||||||||||||||||||||
Internal-use software |
( |
) |
( |
) |
||||||||||||||||||||
Customer lists/relationships |
( |
) |
( |
) |
||||||||||||||||||||
Trade names |
( |
) |
( |
) |
||||||||||||||||||||
Software to be sold |
( |
) |
( |
) |
||||||||||||||||||||
Technology-based intangible |
( |
) |
||||||||||||||||||||||
Other |
( |
) |
( |
) |
||||||||||||||||||||
Amortizable intangibles |
( |
) |
( |
) |
||||||||||||||||||||
Intangibles |
$ |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
9
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Amortization of intangibles was $25,555 for the quarter ended March 31, 2017 and $18,148 for the quarter ended March 31, 2016. Based on the intangibles in service as of March 31, 2017, estimated future amortization expense is as follows:
(in thousands) |
Estimated
amortization
expense
|
|||
Remainder of 2017 |
$ |
|||
2018 |
||||
2019 |
||||
2020 |
||||
2021 |
||||
During the quarter ended March 31, 2017, we acquired internal-use software in the normal course of business. We also acquired intangible assets in conjunction with acquisitions (Note 6). The following intangible assets were acquired during the quarter ended March 31, 2017:
(in thousands) |
Amount |
Weighted-average amortization period
(in years)
|
||||
Internal-use software |
$ |
|||||
Customer lists/relationships |
||||||
Acquired intangibles |
$ |
|||||
Information regarding acquired intangibles does not include adjustments recorded during the quarter ended March 31, 2017 for changes in the estimated fair values of intangibles acquired during 2016 through acquisitions. Information regarding these adjustments can be found in Note 6.
(in thousands) |
Small
Business
Services
|
Financial
Services
|
Direct
Checks
|
Total |
||||||||||||
Balance, December 31, 2016: |
||||||||||||||||
Goodwill, gross |
$ |
$ |
$ |
$ |
||||||||||||
Accumulated impairment charges |
( |
) |
( |
) |
||||||||||||
Goodwill, net of accumulated impairment charges |
||||||||||||||||
Goodwill resulting from acquisitions |
— |
— |
||||||||||||||
Measurement-period adjustments for previous acquisitions (Note 6) |
( |
) |
— |
( |
) |
|||||||||||
Sale of small business distributor (Note 3) |
( |
) |
— |
— |
( |
) |
||||||||||
Reclassification to assets held for sale |
( |
) |
— |
— |
( |
) |
||||||||||
Currency translation adjustment |
— |
— |
||||||||||||||
Balance, March 31, 2017: |
||||||||||||||||
Goodwill, gross |
||||||||||||||||
Accumulated impairment charges |
( |
) |
( |
) |
||||||||||||
Goodwill, net of accumulated impairment charges |
$ |
$ |
$ |
$ |
||||||||||||
10
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(in thousands) |
March 31, 2017 |
December 31, 2016 |
||||||
Contract acquisition costs |
$ |
$ |
||||||
Loans and notes receivable from Safeguard distributors |
||||||||
Postretirement benefit plan asset |
||||||||
Deferred advertising costs |
||||||||
Other |
||||||||
Other non-current assets |
$ |
$ |
||||||
Quarter Ended March 31, |
||||||||
(in thousands) |
2017 |
2016 |
||||||
Balance, beginning of year |
$ |
$ |
||||||
Additions(1)
|
||||||||
Amortization |
( |
) |
( |
) |
||||
Other |
( |
) |
( |
) |
||||
Balance, end of period |
$ |
$ |
||||||
(in thousands) |
March 31, 2017 |
December 31, 2016 |
||||||
Funds held for customers |
$ |
$ |
||||||
Deferred revenue |
||||||||
Acquisition-related liabilities(1)
|
||||||||
Income tax |
||||||||
Wages, including vacation |
||||||||
Customer rebates |
||||||||
Employee profit sharing/cash bonus |
||||||||
Contract acquisition costs due within one year |
||||||||
Restructuring due within one year (Note 8) |
||||||||
Other |
||||||||
Accrued liabilities |
$ |
$ |
||||||
(1) Consists of holdback payments due at future dates and liabilities for contingent consideration. Further information regarding liabilities for contingent consideration can be found in Note 7.
11
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(in thousands) |
March 31, 2017 |
December 31, 2016 |
||||||
Contract acquisition costs |
$ |
$ |
||||||
Acquisition-related liabilities(1)
|
||||||||
Other |
||||||||
Other non-current liabilities |
$ |
$ |
||||||
Note 4: Earnings per share
Quarter Ended March 31, |
||||||||
(in thousands, except per share amounts) |
2017 |
2016 |
||||||
Earnings per share – basic: |
||||||||
Net income |
$ |
$ |
||||||
Income allocated to participating securities |
( |
) |
( |
) |
||||
Income available to common shareholders |
$ |
$ |
||||||
Weighted-average shares outstanding |
||||||||
Earnings per share – basic |
$ |
$ |
||||||
Earnings per share – diluted: |
||||||||
Net income |
$ |
$ |
||||||
Income allocated to participating securities |
( |
) |
( |
) |
||||
Re-measurement of share-based awards classified as liabilities |
( |
) |
||||||
Income available to common shareholders |
$ |
$ |
||||||
Weighted-average shares outstanding |
||||||||
Dilutive impact of potential common shares |
||||||||
Weighted-average shares and potential common shares outstanding |
||||||||
Earnings per share – diluted |
$ |
$ |
||||||
Antidilutive options excluded from calculation |
||||||||
12
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 5: Other comprehensive income
Accumulated other comprehensive loss components |
Amounts reclassified from accumulated other comprehensive loss |
Affected line item in consolidated statements of comprehensive income |
||||||||
Quarter Ended March 31, |
||||||||||
(in thousands) |
2017 |
2016 |
||||||||
Amortization of postretirement benefit plan items: |
||||||||||
Prior service credit |
$ |
$ |
(1) |
|||||||
Net actuarial loss |
( |
) |
( |
) |
(1) |
|||||
Total amortization |
( |
) |
( |
) |
(1) |
|||||
Tax benefit |
(1) |
|||||||||
Total reclassifications, net of tax |
$ |
( |
) |
$ |
( |
) |
||||
(1) Amortization of postretirement benefit plan items is included in the computation of net periodic benefit income as presented in Note 10. Net periodic benefit income is included in cost of revenue and SG&A expense in the consolidated statements of comprehensive income, based on the composition of our workforce. A portion of net periodic benefit income is capitalized as a component of labor costs and is included in inventories and intangibles in our consolidated balance sheets.
(in thousands) |
Postretirement benefit plans, net of tax |
Net unrealized loss on marketable securities,
net of tax(1)
|
Currency translation adjustment |
Accumulated other comprehensive loss |
||||||||||||
Balance, December 31, 2016 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
Other comprehensive income before reclassifications |
||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss |
||||||||||||||||
Net current-period other comprehensive income |
||||||||||||||||
Balance, March 31, 2017 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
Note 6: Acquisitions
We periodically complete business combinations that align with our business strategy. The assets and liabilities acquired are recorded at their estimated fair values and the results of operations of each acquired business are included in our consolidated statements of comprehensive income from their acquisition dates. Transaction costs related to acquisitions are expensed as incurred and are included in SG&A expense in the consolidated statements of comprehensive income. Transaction costs were not significant to our consolidated statements of comprehensive income for the quarters ended March 31, 2017 and 2016. The acquisitions completed during the quarter ended March 31, 2017 were cash transactions, funded by net cash provided by operating activities and/or use of our revolving credit facility. We completed these acquisitions to increase our mix of marketing solutions and other services revenue and to reach new customers.
2017 acquisitions – In February 2017, we acquired selected assets of Panthur Pty Ltd (Panthur), an Australian web hosting and domain registration service provider. The preliminary allocation of the purchase price based upon the estimated fair
13
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
values of the assets acquired and liabilities assumed resulted in non-deductible goodwill of $1,198 . The acquisition resulted in goodwill as we expect to utilize Panthur's platform as we selectively expand into foreign markets. We expect to finalize the allocation of the purchase price by mid-2017 when our valuation of the acquired customer list and the determination of its estimated useful life is completed. The operations of this business from its acquisition date are included within our Small Business Services segment. In April 2017, we completed the acquisition of a business which will be included within our Financial Services segment. Further information regarding this acquisition can be found in Note 15.
Also during the quarter ended March 31, 2017, we acquired the operations of several small business distributors which are included in our Small Business Services segment and for which the allocations of the purchase price are complete. The assets acquired consisted primarily of customer list intangible assets. As these small business distributors were previously part of our Safeguard distributor network, our revenue was not impacted by these acquisitions and the impact to our costs was not significant.
Information regarding the useful lives of acquired intangibles and goodwill by reportable segment can be found in Note 3. Information regarding the calculation of the estimated fair values of the acquired intangibles can be found in Note 7. As our acquisitions were immaterial to our reported operating results both individually and in the aggregate, pro forma results of operations are not provided. The following illustrates the preliminary allocation, as of March 31, 2017, of the aggregate purchase price for the above acquisitions to the assets acquired and liabilities assumed:
(in thousands) |
2017 acquisitions |
|||
Net tangible assets acquired and liabilities assumed |
$ |
( |
) |
|
Identifiable intangible assets: |
||||
Customer lists/relationships |
||||
Internal-use software |
||||
Total intangible assets |
||||
Goodwill |
||||
Total aggregate purchase price |
||||
Liabilities for holdback payments |
( |
) |
||
Net cash paid for 2017 acquisitions |
||||
Holdback payments for prior year acquisitions |
||||
Payments for acquisitions, net of cash acquired |
$ |
|||
During the quarter ended March 31, 2016, we completed the following acquisitions:
• |
In February 2016, we acquired selected assets of Category 99, Inc., doing business as MacHighway®, a web hosting and domain registration service provider. |
• |
In March 2016, we acquired selected assets of New England Art Publishers, Inc., doing business as Birchcraft Studios, a supplier of personalized invitations, holiday cards, all-occasion cards and social announcements. |
• |
During the first quarter of 2016, we acquired the operations of several small business distributors, all of which were previously part of our Safeguard distributor network. |
14
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 7: Fair value measurements
Non-recurring asset impairment analysis – During the first quarter of 2017, we recorded a pre-tax asset impairment charge of $5,296 related to a small business distributor classified as held for sale in the consolidated balance sheets. Based on on-going negotiations for the sale of the business, including multiple offers, we determined that the business' carrying value exceeded its estimated fair value less costs to sell of $5,000 (Level 3 fair value measurement) and we reduced the carrying value of the related customer list intangible asset. Further information regarding assets held for sale can be found in Note 3.
2017 acquisitions – For all acquisitions, we are required to measure the fair value of the net identifiable tangible and intangible assets and liabilities acquired. Information regarding the acquisitions completed during the quarter ended March 31, 2017 can be found in Note 6. The identifiable net assets acquired during the quarter ended March 31, 2017 were comprised primarily of customer list intangible assets. The estimated fair value of the customer lists was calculated by discounting the estimated cash flows expected to be generated by the assets. Key assumptions used in the calculations included same-customer revenue growth rates and estimated customer retention rates based on the acquirees' historical information.
Recurring fair value measurements – Funds held for customers included cash equivalents and available-for-sale marketable securities (Note 3). The cash equivalents consisted of a money market fund investment which is traded in an active market. Because of the short-term nature of the underlying investments, the cost of this investment approximates its fair value. Available-for-sale marketable securities consisted of a mutual fund investment that invests in Canadian and provincial government securities and investments in Canadian guaranteed investment certificates (GICs) with maturities of 1 year or less. The mutual fund is not traded in an active market and its fair value is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. The fair value of the GICs approximated cost due to their relatively short duration. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss in the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue in the consolidated statements of comprehensive income and were not significant for the quarters ended March 31, 2017 and 2016.
We have recorded liabilities for contingent consideration related to certain of our acquisitions, primarily the acquisitions of Verify Valid and a small business distributor during 2015 and the acquisition of Data Support Systems, Inc. during 2016. Further information regarding these acquisitions can be found under the caption “Note 5: Acquisitions” in the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K. Under the Verify Valid and Data Support Systems agreements, there are no maximum amounts of contingent payments specified , although payments are based on a percentage of the revenue or operating income generated by the business. The fair value of accrued contingent consideration is remeasured each reporting period. Increases or decreases in projected revenue, gross profit or operating income, as appropria
15
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
te, and the related probabilities of achieving the forecasted results may result in a higher or lower fair value measurement. Changes in fair value resulting from changes in the timing, amount of, or likelihood of contingent payments are included in SG&A expense in the consolidated statements of comprehensive income. Changes in fair value resulting from accretion for the passage of time are included in interest expense in the consolidated statements of comprehensive income.
(in thousands) |
Quarter Ended
March 31, 2017
|
|||
Balance, December 31, 2016 |
$ |
|||
Change in fair value |
||||
Payments |
( |
) |
||
Balance, March 31, 2017 |
$ |
|||
Fair value measurements using |
||||||||||||||||
|
Fair value as of
March 31, 2017
|
Quoted prices in active markets for identical assets |
Significant other observable inputs |
Significant unobservable inputs |
|||||||||||||
(in thousands) |
(Level 1) |
(Level 2) |
(Level 3) |
|||||||||||||
Cash equivalents (funds held for customers) |
$ |
$ |
$ |
$ |
||||||||||||
Available-for-sale marketable securities (funds held for customers) |
||||||||||||||||
Long-term investments in mutual funds |
||||||||||||||||
Accrued contingent consideration |
( |
) |
( |
) |
||||||||||||
Fair value measurements using |
||||||||||||||||
|
Fair value as of
December 31, 2016
|
Quoted prices in active markets for identical assets |
Significant other observable inputs |
Significant unobservable inputs |
|||||||||||||
(in thousands) |
(Level 1) |
(Level 2) |
(Level 3) |
|||||||||||||
Cash equivalents (funds held for customers) |
$ |
$ |
$ |
$ |
||||||||||||
Available-for-sale marketable securities (funds held for customers) |
||||||||||||||||
Long-term investments in mutual funds |
||||||||||||||||
Accrued contingent consideration |
( |
) |
( |
) |
||||||||||||
Fair value measurements of other financial instruments – The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate fair value.
Cash and cash included within funds held for customers – The carrying amounts reported in the consolidated balance sheets approximate fair value because of the short-term nature of these items.
Loans and notes receivable from Safeguard distributors – We have receivables for loans made to certain of our Safeguard distributors. In addition, we have acquired the operations of several small business distributors, which we then sold to our Safeguard distributors. In most cases, we entered into notes receivable upon the sale of the assets. The fair value of these loans and notes receivable is calculated as the present value of expected future cash flows, discounted using an estimated interest rate based on published bond yields for companies of similar risk.
16
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Long-term debt – Information regarding the composition of our long-term debt can be found in Note 11. The carrying amounts reported in the consolidated balance sheets for amounts drawn under our revolving credit facility and our term loan facility, excluding unamortized debt issuance costs, approximate fair value because our interest rates are variable and reflect current market rates.