10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 8, 2020
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 March 31, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from __________ to ___________
Commission file number: 1-7945
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
||
(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 |
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.
☒ |
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).
The number of shares outstanding of registrant’s common stock as of April 30, 2020 was 41,831,715 .
1
PART I – FINANCIAL INFORMATION |
Item 1. FINANCIAL STATEMENTS |
|
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
(in thousands, except share par value) |
March 31, 2020 |
December 31, 2019 |
||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ |
$ |
||||||
Trade accounts receivable, net of allowance for uncollectible accounts of $3,946 and $4,985, respectively |
||||||||
Inventories and supplies |
||||||||
Funds held for customers, including assets carried at fair value of $26,282 and $34,450, respectively |
||||||||
Revenue in excess of billings, net of allowance for uncollectible accounts of $830 as of March 31, 2020 |
||||||||
Other current assets |
||||||||
Total current assets |
||||||||
Deferred income taxes |
||||||||
Long-term investments |
||||||||
Property, plant and equipment, net of accumulated depreciation of $379,141 and $377,180, respectively |
||||||||
Operating lease assets |
||||||||
Intangibles, net of accumulated amortization of $555,739 and $557,023, respectively |
||||||||
Goodwill |
||||||||
Assets held for sale |
||||||||
Other non-current assets |
||||||||
Total assets |
$ |
$ |
||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ |
$ |
||||||
Funds held for customers |
||||||||
Accrued liabilities |
||||||||
Total current liabilities |
||||||||
Long-term debt |
||||||||
Operating lease liabilities |
||||||||
Deferred income taxes |
||||||||
Other non-current liabilities |
||||||||
Commitments and contingencies (Notes 12 and 15) |
||||||||
Shareholders' equity: |
||||||||
Common shares $1 par value (authorized: 500,000 shares; outstanding: March 31, 2020 – 41,691; December 31, 2019 – 42,126) |
||||||||
Additional paid-in capital |
||||||||
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 (LOSS) INCOME
(unaudited)
|
Quarter Ended March 31, |
||||||||
(in thousands, except per share amounts) |
2020 |
2019 |
||||||
Product revenue |
$ |
$ |
||||||
Service revenue |
||||||||
Total revenue |
||||||||
Cost of products |
( |
) |
( |
) |
||||
Cost of services |
( |
) |
( |
) |
||||
Total cost of revenue |
( |
) |
( |
) |
||||
Gross profit |
||||||||
Selling, general and administrative expense |
( |
) |
( |
) |
||||
Restructuring and integration expense |
( |
) |
( |
) |
||||
Asset impairment charges |
( |
) |
||||||
Operating (loss) income |
( |
) |
||||||
Interest expense |
( |
) |
( |
) |
||||
Other income |
||||||||
(Loss) income before income taxes |
( |
) |
||||||
Income tax benefit (provision) |
( |
) |
||||||
Net (loss) income |
$ |
( |
) |
$ |
||||
Comprehensive (loss) income |
$ |
( |
) |
$ |
||||
Basic (loss) earnings per share |
( |
) |
||||||
Diluted (loss) earnings per share |
( |
) |
||||||
See Condensed Notes to Unaudited Consolidated Financial Statements
3
|
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
|
(in thousands) |
Common shares |
Common shares
par value
|
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive loss |
Total |
|||||||||||||||||
Balance, December 31, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||
Net loss |
— |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||||
Cash dividends ($0.30 per share) |
— |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||||
Common shares issued |
— |
— |
|||||||||||||||||||||
Common shares repurchased |
( |
) |
( |
) |
( |
) |
( |
) |
— |
( |
) |
||||||||||||
Other common shares retired |
( |
) |
( |
) |
( |
) |
— |
— |
( |
) |
|||||||||||||
Employee share-based compensation |
— |
— |
— |
— |
|||||||||||||||||||
Adoption of Accounting Standards Update No. 2016-13 (Note 2) |
— |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||||
Other comprehensive loss |
— |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||||
Balance, March 31, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||
(in thousands) |
Common shares |
Common shares
par value
|
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive loss |
Total |
|||||||||||||||||
Balance, December 31, 2018 |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||
Net income |
— |
— |
— |
— |
|||||||||||||||||||
Cash dividends ($0.30 per share) |
— |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||||
Common shares issued |
— |
— |
|||||||||||||||||||||
Common shares repurchased |
( |
) |
( |
) |
( |
) |
( |
) |
— |
( |
) |
||||||||||||
Other common shares retired |
( |
) |
( |
) |
( |
) |
— |
— |
( |
) |
|||||||||||||
Employee share-based compensation |
— |
— |
— |
— |
|||||||||||||||||||
Adoption of Accounting Standards Update No. 2016-02 |
— |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||||
Other comprehensive income |
— |
— |
— |
— |
|||||||||||||||||||
Balance, March 31, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||
See Condensed Notes to Unaudited Consolidated Financial Statements
4
|
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Quarter Ended March 31, |
||||||||||
(in thousands) |
2020 |
2019 |
||||||||
Cash flows from operating activities: |
||||||||||
Net (loss) income |
$ |
( |
) |
$ |
||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
||||||||||
Depreciation |
||||||||||
Amortization of intangibles |
||||||||||
Operating lease expense |
||||||||||
Asset impairment charges |
||||||||||
Amortization of prepaid product discounts |
||||||||||
Deferred income taxes |
( |
) |
||||||||
Employee share-based compensation expense |
||||||||||
Other non-cash items, net |
||||||||||
Changes in assets and liabilities: |
||||||||||
Trade accounts receivable |
||||||||||
Inventories and supplies |
( |
) |
||||||||
Other current assets |
( |
) |
( |
) |
||||||
Non-current assets |
( |
) |
( |
) |
||||||
Accounts payable |
( |
) |
( |
) |
||||||
Prepaid product discount payments |
( |
) |
( |
) |
||||||
Other accrued and non-current liabilities |
( |
) |
( |
) |
||||||
Net cash provided by operating activities |
||||||||||
Cash flows from investing activities: |
||||||||||
Purchases of capital assets |
( |
) |
( |
) |
||||||
Purchases of customer funds marketable securities |
( |
) |
( |
) |
||||||
Proceeds from customer funds marketable securities |
||||||||||
Other |
( |
) |
||||||||
Net cash used by investing activities |
( |
) |
( |
) |
||||||
Cash flows from financing activities: |
||||||||||
Proceeds from issuing long-term debt |
||||||||||
Payments on long-term debt |
( |
) |
( |
) |
||||||
Net change in customer funds obligations |
( |
) |
( |
) |
||||||
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 provided (used) by financing activities |
( |
) |
||||||||
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents |
( |
) |
||||||||
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents |
( |
) |
||||||||
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year |
||||||||||
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3) |
$ |
$ |
||||||||
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, 2020, the consolidated statements of comprehensive (loss) income for the quarters ended March 31, 2020 and 2019, the consolidated statements of shareholders’ equity for the quarters ended March 31, 2020 and 2019 and the consolidated statements of cash flows for the quarters ended March 31, 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 result of which forms the basis for making judgments about the carrying values of 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.
Amounts within cash flows from operating activities and cash flows from investing activities on the consolidated statement of cash flows for the quarter ended March 31, 2019 have been modified to conform to the current year presentation. 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 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 was presented separately.
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS |
Recently Adopted Accounting Standards
ASU No. 2016-13 – In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments. Subsequently, the FASB issued several amendments to this standard. These standards replace the incurred loss methodology previously utilized for valuing financial instruments with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected losses under the CECL methodology is applicable to financial instruments measured at amortized cost, including accounts and loans 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
6
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
uncertainties affecting our loans and notes receivable can be found in Note 15. Further information regarding our allowances for uncollectible accounts can be found in Note 3.
Our trade accounts receivable and unbilled receivables are not interest-bearing. Interest rates on our loans and notes receivable generally range from 6 % to 8 % and reflect market interest rates at the time the transactions were executed. Accrued interest included in loans and notes receivable is not significant.
ASU No. 2018-13 – In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements. This standard removes, modifies and adds certain disclosures related to recurring and nonrecurring fair value measurements. During 2018, we adopted the provisions of the standard that remove and modify disclosure requirements. The additional disclosures were effective for us on January 1, 2020 and are required to be applied prospectively to fair value measurements completed on or after that date. Disclosures regarding our fair value measurements can be found in Note 7.
ASU No. 2018-15 – In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the new standard. We adopted this standard on January 1, 2020, applying it prospectively to eligible costs incurred on or after this date. Adoption of this standard did impact our results of operations and financial position, as we previously expensed these implementation costs as incurred. As of March 31, 2020, $7,507 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 quarters ended March 31, 2020 and 2019 were as follows:
Quarter Ended March 31, |
||||||||
(in thousands) |
2020 |
2019 |
||||||
Balance, beginning of year |
$ |
$ |
||||||
Bad debt expense |
||||||||
Write-offs and other |
( |
) |
( |
) |
||||
Balance, end of period |
$ |
$ |
||||||
Inventories and supplies – Inventories and supplies were comprised of the following:
(in thousands) |
March 31, 2020 |
December 31, 2019 |
||||||
Raw materials |
$ |
$ |
||||||
Semi-finished goods |
||||||||
Finished goods |
||||||||
Supplies |
||||||||
Inventories and supplies |
$ |
$ |
||||||
7
|
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:
March 31, 2020 |
||||||||||||||||
(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 debt securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
(1) Funds held for customers, as reported on the consolidated balance sheet as of March 31, 2020, also included cash of $64,657 .
December 31, 2019 |
||||||||||||||||
(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 debt securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
(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 March 31, 2020 were as follows:
(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 debt securities |
$ |
|||
Further information regarding the fair value of available-for-sale debt securities can be found in Note 7.
Revenue in excess of billings – Revenue in excess of billings was comprised of the following:
(in thousands) |
March 31, 2020 |
December 31, 2019 |
||||||
Conditional right to receive consideration |
$ |
$ |
||||||
Unconditional right to receive consideration |
||||||||
Revenue in excess of billings |
$ |
$ |
||||||
8
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
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. Changes in this allowance for the quarter ended March 31, 2020 were as follows:
(in thousands) |
Quarter Ended
March 31, 2020
|
|||
Balance, beginning of year |
$ |
|||
Adoption of ASU No. 2016-13 (Note 2) |
||||
Bad debt expense |
||||
Balance, end of period |
$ |
|||
Assets held for sale – Assets held for sale as of December 31, 2019 consisted of a small business customer list and certain Cloud Solutions internal-use software. The small business customer list was also held for sale as of March 31, 2020. During the first quarter of 2020, we determined that the internal-use software was fully impaired, and we recorded an asset impairment charge of $1,530 . Customer attrition in the business utilizing the software caused us to evaluate the asset for impairment, and this analysis indicated that the asset was fully impaired.
Also held for sale as of March 31, 2020, was an additional small business customer list. During the first quarter of 2020, we agreed to sales terms for this customer list, and we completed the sale early in the second quarter of 2020. Based on the negotiated sales price, we recorded an asset impairment charge of $697 to write-down the asset's carrying value to its fair value less costs to sell. We are actively marketing the remaining asset held for sale and expect that its selling price will equal or exceed its current carrying value.
Intangibles – Intangibles were comprised of the following:
March 31, 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 |
$ |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
Customer lists/relationships |
( |
) |
( |
) |
||||||||||||||||||||
Software to be sold |
( |
) |
( |
) |
||||||||||||||||||||
Technology-based intangibles |
( |
) |
( |
) |
||||||||||||||||||||
Trade names |
( |
) |
( |
) |
||||||||||||||||||||
Intangibles |
$ |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
During the quarter ended March 31, 2020, we recorded asset impairment charges related to certain intangible assets. Further information can be found in Note 7.
Amortization of intangibles was $23,511 for the quarter ended March 31, 2020 and $28,174 for the quarter ended March 31, 2019. During the quarter ended March 31, 2020, we acquired internal-use software of $10,146 , with a weighted-average amortization period of 3 years.
Based on the intangibles in service as of March 31, 2020, estimated future amortization expense is as follows:
(in thousands) |
Estimated
amortization
expense
|
|||
Remainder of 2020 |
$ |
|||
2021 |
||||
2022 |
||||
2023 |
||||
2024 |
||||
9
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
Goodwill – Changes in goodwill by reportable segment and in total for the quarter ended March 31, 2020 were as follows :
(in thousands) |
Payments |
Cloud Solutions |
Promotional Solutions |
Checks |
Total |
|||||||||||||||
Balance, December 31, 2019: |
||||||||||||||||||||
Goodwill, gross |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
Accumulated impairment charges |
( |
) |
( |
) |
( |
) |
||||||||||||||
Goodwill, net of accumulated impairment charges |
||||||||||||||||||||
Impairment charges (Note 7) |
— |
( |
) |
( |
) |
— |
( |
) |
||||||||||||
Currency translation adjustment |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||
Balance, March 31, 2020 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
Balance, March 31, 2020: |
||||||||||||||||||||
Goodwill, gross |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
Accumulated impairment charges |
( |
) |
( |
) |
( |
) |
||||||||||||||
Goodwill, net of accumulated impairment charges |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
Other non-current assets – Other non-current assets were comprised of the following:
(in thousands) |
March 31, 2020 |
December 31, 2019 |
||||||
Postretirement benefit plan asset |
$ |
$ |
||||||
Loans and notes receivable from Safeguard distributors, net of allowance for doubtful accounts(1)
|
||||||||
Prepaid product discounts |
||||||||
Deferred sales commissions(2)
|
||||||||
Other |
||||||||
Other non-current assets |
$ |
$ |
||||||
(1) Amount Includes the non-current portion of loans and note receivablles. The current portion of these receivables is included in other current assets on the consolidated balance sheets and was $3,366 as of March 31, 2020 and $3,511 as of December 31, 2019.
(2) Amortization of deferred sales commissions was $882 for the quarter ended March 31, 2020 and $697 for the quarter ended March 31, 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 quarters ended March 31, 2020 and 2019 were as follows:
Quarter Ended March 31, |
||||||||
(in thousands) |
2020 |
2019 |
||||||
Balance, beginning of year |
$ |
$ |
||||||
Adoption of ASU No. 2016-13 (Note 2) |
— |
|||||||
Bad debt expense |
||||||||
Balance, end of period |
$ |
$ |
||||||
10
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
During the quarter ended March 31, 2020, we recorded a loan-specific allowance related to a distributor that was underperforming. In calculating this reserve, we utilized various valuation techniques to determine the value of the underlying collateral, resulting in an allowance of $6,128 as of March 31, 2020. Other past due receivables and those on non-accrual status were not significant as of March 31, 2020.
We categorize loans and notes receivable into risk categories based on information about the ability of borrowers to service their debt, including current financial information, historical payment experience, current economic trends and other factors. The highest quality receivables are assigned a 1-2 internal grade. Those that have a potential weakness requiring management's attention are assigned a 3-4 internal grade.
The following table presents loans and notes receivable from Safeguard distributors, including the current portion, by credit quality indicator and by year of origination, as of March 31, 2020. There were no write-offs or recoveries recorded during the quarter ended March 31, 2020.
Loans and notes receivable from distributors amortized cost basis by origination year |
||||||||||||||||||||||||
(in thousands) |
2019 |
2018 |
2017 |
2016 |
Prior |
Total |
||||||||||||||||||
Risk rating: |
||||||||||||||||||||||||
1-2 internal grade |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
3-4 internal grade |
||||||||||||||||||||||||
Loans and notes receivable |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
Changes in prepaid product discounts during the quarters ended March 31, 2020 and 2019 were as follows:
Quarter Ended March 31, |
||||||||
(in thousands) |
2020 |
2019 |
||||||
Balance, beginning of year |
$ |
$ |
||||||
Additions(1)
|
||||||||
Amortization |
( |
) |
( |
) |
||||
Other |
( |
) |
( |
) |
||||
Balance, end of period |
$ |
$ |
||||||
(1) Prepaid product discounts are generally accrued upon contract execution. Cash payments for prepaid product discounts were $7,321 for the quarter ended March 31, 2020 and $9,189 for the quarter ended March 31, 2019.
Accrued liabilities – Accrued liabilities were comprised of the following:
(in thousands) |
March 31, 2020 |
December 31, 2019 |
||||||
Deferred revenue(1)
|
$ |
$ |
||||||
Employee cash bonuses |
||||||||
Operating lease liabilities |
||||||||
Prepaid product discounts due within one year |
||||||||
Customer rebates |
||||||||
Other |
||||||||
Accrued liabilities |
$ |
$ |
||||||
(1) $20,672 of the December 31, 2019 amount was recognized as revenue during the quarter ended March 31, 2020.
11
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
(in thousands) |
March 31, 2020 |
March 31, 2019 |
||||||
Cash and cash equivalents |
$ |
$ |
||||||
Restricted cash and restricted cash equivalents included in funds held for customers |
||||||||
Total cash, cash equivalents, restricted cash and restricted cash equivalents |
$ |
$ |
||||||
NOTE 4: (LOSS) EARNINGS PER SHARE |
The following table reflects the calculation of basic and diluted (loss) earnings per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted (loss) earnings per share because their effect would have been antidilutive.
Quarter Ended March 31, |
||||||||
(in thousands, except per share amounts) |
2020 |
2019 |
||||||
(Loss) earnings per share – basic: |
||||||||
Net (loss) income |
$ |
( |
) |
$ |
||||
Income allocated to participating securities |
( |
) |
( |
) |
||||
(Loss) income available to common shareholders |
$ |
( |
) |
$ |
||||
Weighted-average shares outstanding |
||||||||
(Loss) earnings per share – basic |
$ |
( |
) |
$ |
||||
(Loss) earnings per share – diluted: |
||||||||
Net (loss) income |
$ |
( |
) |
$ |
||||
Income allocated to participating securities |
( |
) |
( |
) |
||||
Re-measurement of share-based awards classified as liabilities |
( |
) |
||||||
(Loss) income available to common shareholders |
$ |
( |
) |
$ |
||||
Weighted-average shares outstanding |
||||||||
Dilutive impact of potential common shares |
||||||||
Weighted-average shares and potential common shares outstanding |
||||||||
(Loss) 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 (LOSS) INCOME |
Reclassification adjustments – Information regarding amounts reclassified from accumulated other comprehensive loss to net (loss) income was as follows:
Accumulated other comprehensive loss components |
Amounts reclassified from accumulated other comprehensive loss |
Affected line item in consolidated statements of comprehensive (loss) income |
||||||||
Quarter Ended March 31, |
||||||||||
(in thousands) |
2020 |
2019 |
||||||||
Realized gain on interest rate swap |
$ |
$ |
Interest expense |
|||||||
Tax expense |
( |
) |
Income tax benefit (provision) |
|||||||
Realized gain on interest rate swap, net of tax |
Net income |
|||||||||
Amortization of postretirement benefit plan items: |
||||||||||
Prior service credit |
||||||||||