October 25, 2019 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission file number: 1-7945

DELUXE CORPORATION

(Exact name of registrant as specified in its charter)



MN			41-0216800
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
3680 Victoria St. N.	Shoreview	MN	55126-2966
(Address of principal executive offices)			(Zip Code)

(651) 483-7111

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.00 per share	DLX	NYSE

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

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

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



Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ No

The number of shares outstanding of registrant’s common stock as of October 16, 2019 was 42,101,861.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

DELUXE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share par value)

(Unaudited)



	September 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	73,472		$	59,740
Trade accounts receivable, net of allowances for uncollectible accounts	142,845			173,862
Inventories and supplies	42,194			46,441
Funds held for customers	94,848			100,982
Revenue in excess of billings	25,745			30,458
Other current assets	46,612			38,563
Total current assets	425,716			450,046
Deferred income taxes	5,494			2,886
Long-term investments	44,616			43,773
Property, plant and equipment (net of accumulated depreciation of $376,165 and $367,205, respectively)	92,661			90,342
Operating lease assets	41,739			—
Intangibles (net of accumulated amortization of $591,450 and $535,627, respectively)	287,498			359,965
Goodwill	800,286			1,160,626
Assets held for sale	1,350			1,350
Other non-current assets	189,603			196,108
Total assets	$	1,888,963		$	2,305,096

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	97,588		$	106,978
Accrued liabilities	264,259			284,281
Long-term debt due within one year	—			791
Total current liabilities	361,847			392,050
Long-term debt	924,000			911,073
Operating lease liabilities	32,434			—
Deferred income taxes	10,257			46,680
Other non-current liabilities	34,898			39,880
Commitments and contingencies (Notes 14 and 15)
Shareholders' equity:
Common shares $1 par value (authorized: 500,000 shares; outstanding: September 30, 2019 – 42,099; December 31, 2018 – 44,647)	42,099			44,647
Retained earnings	540,612			927,345
Accumulated other comprehensive loss	(57,184		)	(56,579		)
Total shareholders’ equity	525,527			915,413
Total liabilities and shareholders’ equity	$	1,888,963		$	2,305,096

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands, except per share amounts)

(Unaudited)



	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Product revenue	$	346,315		$	352,767		$	1,043,896		$	1,076,110
Service revenue	147,278			140,423			442,749			397,239
Total revenue	493,593			493,190			1,486,645			1,473,349
Cost of products	(133,807		)	(132,996		)	(398,869		)	(400,700		)
Cost of services	(69,916		)	(64,638		)	(207,006		)	(175,894		)
Total cost of revenue	(203,723		)	(197,634		)	(605,875		)	(576,594		)
Gross profit	289,870			295,556			880,770			896,755
Selling, general and administrative expense	(213,318		)	(208,533		)	(665,787		)	(629,272		)
Restructuring and integration expense	(26,255		)	(5,135		)	(49,089		)	(12,915		)
Asset impairment charges	(390,980		)	(99,170		)	(390,980		)	(101,319		)
Operating (loss) income	(340,683		)	(17,282		)	(225,086		)	153,249
Interest expense	(8,710		)	(7,244		)	(27,251		)	(18,953		)
Other income	2,183			2,356			6,118			6,081
(Loss) income before income taxes	(347,210		)	(22,170		)	(246,219		)	140,377
Income tax benefit (provision)	28,717			(8,913		)	1,498			(47,916		)
Net (loss) income	$	(318,493	)	$	(31,083	)	$	(244,721	)	$	92,461
Comprehensive (loss) income	$	(322,150	)	$	(30,902	)	$	(245,326	)	$	87,936
Basic (loss) earnings per share	(7.49		)	(0.67		)	(5.65		)	1.94
Diluted (loss) earnings per share	(7.49		)	(0.67		)	(5.65		)	1.93

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands)

(Unaudited)



	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



	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 (Note 2)	—		—			—			(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 SHAREHOLDERS' EQUITY (continued)

(in thousands)

(Unaudited)



	Common shares		Common shares par value			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total
Balance, June 30, 2018	47,623		$	47,623		$	—		$	1,076,683		$	(49,170	)	$	1,075,136
Net loss	—		—			—			(31,083		)	—			(31,083		)
Cash dividends ($0.30 per share)	—		—			—			(14,209		)	—			(14,209		)
Common shares issued	28		28			1,504			—			—			1,532
Common shares repurchased	(1,346	)	(1,346		)	(5,246		)	(73,412		)	—			(80,004		)
Other common shares retired	—		—			(22		)	—			—			(22		)
Employee share-based compensation	—		—			3,764			—			—			3,764
Other comprehensive income	—		—			—			—			181			181
Balance, September 30, 2018	46,305		$	46,305		$	—		$	957,979		$	(48,989	)	$	955,295



	Common shares		Common shares par value			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total
Balance, December 31, 2017	47,953		$	47,953		$	—		$	1,004,657		$	(37,597	)	$	1,015,013
Net income	—		—			—			92,461			—			92,461
Cash dividends ($0.90 per share)	—		—			—			(43,012		)	—			(43,012		)
Common shares issued	518		518			18,181			—			—			18,699
Common shares repurchased	(1,919	)	(1,919		)	(10,121		)	(107,960		)	—			(120,000		)
Other common shares retired	(247	)	(247		)	(17,601		)	—			—			(17,848		)
Employee share-based compensation	—		—			9,541			—			—			9,541
Adoption of Accounting Standards Update No. 2014-09	—		—			—			4,966			—			4,966
Adoption of Accounting Standards Update No. 2018-02	—		—			—			6,867			(6,867		)	—
Other comprehensive loss	—		—			—			—			(4,525		)	(4,525		)
Balance, September 30, 2018	46,305		$	46,305		$	—		$	957,979		$	(48,989	)	$	955,295

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net (loss) income	$	(244,721	)	$	92,461
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation	12,206			12,724
Amortization of intangibles	83,224			84,199
Operating lease expense	15,145			—
Asset impairment charges	390,980			101,319
Amortization of prepaid product discounts	17,861			16,976
Deferred income taxes	(38,549		)	(12,157		)
Employee share-based compensation expense	14,580			9,481
Loss (gain) on sales of businesses and customer lists	224			(12,855		)
Other non-cash items, net	9,858			5,482
Changes in assets and liabilities, net of effect of acquisitions:
Trade accounts receivable	27,505			1,466
Inventories and supplies	2,728			(2,009		)
Other current assets	(3,213		)	(13,030		)
Non-current assets	(3,346		)	(5,116		)
Accounts payable	(10,779		)	(5,453		)
Prepaid product discount payments	(20,370		)	(19,125		)
Other accrued and non-current liabilities	(45,309		)	(35,261		)
Net cash provided by operating activities	208,024			219,102
Cash flows from investing activities:
Purchases of capital assets	(49,679		)	(42,566		)
Payments for acquisitions, net of cash acquired	(1,598		)	(190,396		)
Purchases of customer funds marketable securities	(3,817		)	(3,981		)
Proceeds from customer funds marketable securities	3,817			3,981
Other	1,398			1,038
Net cash used by investing activities	(49,879		)	(231,924		)
Cash flows from financing activities:
Proceeds from issuing long-term debt	203,500			1,189,500
Payments on long-term debt	(189,500		)	(1,009,139		)
Net change in customer funds obligations	(8,711		)	(58		)
Proceeds from issuing shares under employee plans	3,159			7,300
Employee taxes paid for shares withheld	(3,076		)	(7,969		)
Payments for common shares repurchased	(118,547		)	(120,000		)
Cash dividends paid to shareholders	(39,068		)	(42,943		)
Other	(1,654		)	(4,128		)
Net cash (used) provided by financing activities	(153,897		)	12,563
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents	2,604			(2,446		)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents	6,852			(2,705		)
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year	145,259			128,819
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3)	$	152,111		$	126,114

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, 2019, the consolidated statements of comprehensive (loss) income for the quarters and nine months ended September 30, 2019 and 2018, the consolidated statements of shareholders’ equity for the quarters and nine months ended September 30, 2019 and 2018, and the consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 are unaudited. The consolidated balance sheet as of December 31, 2018 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, 2018 (the “2018 Form 10-K”).

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-18, Restricted Cash. This standard requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. This standard was effective for us on January 1, 2018 and was required to be applied retrospectively. During the quarter ended December 31, 2018, we identified a misstatement in our statement of cash flows presentation under this standard. We concluded that the cash and cash equivalents included in funds held for customers should be included with cash, cash equivalents, restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows, in accordance with ASU No. 2016-18. Additionally, we determined that gross redemptions and purchases of marketable debt securities included in funds held for customers should be presented as cash flows from investing activities in the statements of cash flows. This misstatement affected our consolidated statements of cash flows as presented in our 2018 Quarterly Reports on Form 10-Q.

We assessed the materiality of this misstatement on prior periods' financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements. We concluded that the misstatement was not material to any prior interim period and therefore, amendments of previously filed reports were not required. In accordance with ASC 250, we have corrected the misstatement 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 provided by operating activities.

The impact of the revisions on our consolidated statement of cash flows for the nine months ended September 30, 2018 was as follows:



(in thousands)	Previously reported			Adjustment			Revised
Purchases of customer funds marketable securities	$	—		$	(3,981	)	$	(3,981	)
Proceeds from customer funds marketable securities	—			3,981			3,981
Net cash used by investing activities	(231,924		)	—			(231,924		)
Net change in customer funds obligations	—			(58		)	(58		)
Net cash provided by financing activities	12,621			(58		)	12,563
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents	(1,188		)	(1,258		)	(2,446		)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents	(1,389		)	(1,316		)	(2,705		)
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year	59,240			69,579			128,819
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	57,851		$	68,263		$	126,114

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

Note 2: New accounting pronouncements

ASU No. 2016-02 – In February 2016, the FASB issued ASU No. 2016-02, Leasing. This standard is intended to increase transparency and comparability among organizations by requiring the recognition of lease right-of-use assets and lease liabilities for virtually all leases and by requiring the disclosure of key information about leasing arrangements. In July 2018, the FASB issued two amendments to this standard: ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amended narrow aspects of the guidance in ASU No. 2016-02, and ASU No. 2018-11, Targeted Improvements, which provided an optional transition method under which comparative periods presented in financial statements in the period of adoption would not be restated. In March 2019, the FASB issued ASU No. 2019-01, Codification Improvements. This standard addressed areas identified as companies prepared to implement ASU No. 2016-02. We adopted all of these standards on January 1, 2019, using a modified retrospective approach and the optional transition method under ASU No. 2018-11. As such, prior periods have not been restated to reflect the new guidance.

We elected the practical expedient package outlined in ASU No. 2016-02 under which we did not have to reassess whether an arrangement contains a lease, we carried forward our previous classification of leases as either operating or capital leases, and we did not reassess previously recorded initial direct costs. Additionally, we made the following policy elections:


•	we excluded leases with original terms of 12 months or less from lease assets and lease liabilities;


•	we separated nonlease components, such as common area maintenance charges and utilities, from the associated lease component for real estate leases, based on their estimated fair values; and


•	we used the accounting lease term when determining the incremental borrowing rate for leases with renewal

options.

Adoption of the standards had a material impact on our consolidated balance sheet, but did not have a significant impact on our consolidated statements of comprehensive loss or our consolidated statement of cash flows. The most significant impact was the recognition of operating lease assets of $50,803, current operating lease liabilities of $13,611 and non-current operating lease liabilities of $37,440 as of January 1, 2019. Our accounting for finance leases remained substantially unchanged.

We determine if an arrangement is a lease at inception by considering whether a contract explicitly or implicitly identifies assets deployed in the arrangement and whether we have obtained substantially all of the economic benefits from the use of the underlying assets and direct how and for what purpose the assets are used during the term of the contract. Operating leases are included in operating lease assets, accrued liabilities and operating lease liabilities on our consolidated balance sheet. Finance leases are included in property, plant and equipment, accrued liabilities and other non-current liabilities on our consolidated balance sheet.

Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our lease agreements typically do not provide an implicit rate, we use our incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments. Certain of our lease agreements include options to extend or terminate the lease. The lease term takes into account these options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is included in total cost of revenue and in selling, general and administrative (SG&A) expense on the consolidated statements of comprehensive (loss) income, and interest on finance leases is included in interest expense on the consolidated statements of comprehensive (loss) income. Operating lease expense is recognized on the straight-line basis over the lease term. Information regarding our leases can be found in Note 14.

ASU No. 2016-13 – In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This 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. Subsequently, the FASB issued several amendments to this standard. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which clarifies that receivables arising from operating leases are not within the scope of ASU No. 2016-13. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This standard provides additional guidance on the measurement and presentation of credit losses. In May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief, which provides transition guidance to entities that elect the fair value option for eligible instruments. All of

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

these standards are effective for us on January 1, 2020 and require adoption using a modified retrospective approach. We do not expect the application of these standards to have a significant impact on our results of operations or financial position.

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 required under the guidance are effective for us on January 1, 2020 and are required to be applied prospectively to fair value measurements completed on or after the effective date.

ASU No. 2018-15 – In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the new standard. The guidance is effective for us on January 1, 2020 and may be adopted retrospectively or prospectively to eligible costs incurred on or after the date the guidance is first applied. This new guidance will impact our results of operations and financial position as we currently expense these implementation costs as incurred. We plan to adopt the standard prospectively. As such, the impact of the standard on our financial statements will depend on the transactions that occur subsequent to adoption.

Note 3: Supplemental balance sheet and cash flow information

Allowance for uncollectible accounts – Changes in the allowance for uncollectible accounts for the nine months ended September 30, 2019 and 2018 were as follows:



	Nine Months Ended September 30,
(in thousands)	2019			2018
Balance, beginning of year	$	3,639		$	2,884
Bad debt expense	3,718			2,275
Write-offs, net of recoveries	(2,537		)	(2,036		)
Balance, end of period	$	4,820		$	3,123

Inventories and supplies – Inventories and supplies were comprised of the following:



(in thousands)	September 30, 2019		December 31, 2018
Raw materials	$	7,537	$	7,543
Semi-finished goods	7,396		7,273
Finished goods	23,719		27,608
Supplies	3,542		4,017
Inventories and supplies	$	42,194	$	46,441

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

Available-for-sale debt securities – Available-for-sale debt securities included within funds held for customers were comprised of the following:



	September 30, 2019
(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses			Fair value
Funds held for customers:⁽¹⁾
Domestic money market fund	$	14,000	$	—	$	—		$	14,000
Canadian and provincial government securities	8,856		—		(199		)	8,657
Canadian guaranteed investment certificates	7,552		—		—

Form: 10-Q

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