May 7, 2021 - 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 March 31, 2021


☐			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 April 28, 2021 was 42,201,575.


PART I – FINANCIAL INFORMATION


Item 1. FINANCIAL STATEMENTS


DELUXE CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited)


(in thousands, except share par value)	March 31, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	125,440	$	123,122
Trade accounts receivable, net of allowances for uncollectible accounts	139,547		161,959
Inventories and supplies	37,119		40,130
Funds held for customers, including securities carried at fair value of $25,391 and $28,462, respectively	122,466		119,749
Revenue in excess of billings	27,655		17,617
Other current assets	52,269		44,054
Total current assets	504,496		506,631
Deferred income taxes	4,636		5,444
Long-term investments	46,147		45,919
Property, plant and equipment, net of accumulated depreciation of $365,187 and $360,907, respectively	87,836		88,680
Operating lease assets	41,288		35,906
Intangibles, net of accumulated amortization of $610,707 and $587,273, respectively	254,152		246,760
Goodwill	736,862		736,844
Other non-current assets	217,835		208,679
Total assets	$	1,893,252	$	1,874,863
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	109,064	$	116,990
Funds held for customers	120,581		117,647
Accrued liabilities	174,923		177,183
Total current liabilities	404,568		411,820
Long-term debt	840,000		840,000
Operating lease liabilities	34,288		28,344
Deferred income taxes	15,265		10,643
Other non-current liabilities	40,312		43,218
Commitments and contingencies (Notes 12 and 15)
Shareholders' equity:
Common shares $1 par value (authorized: 500,000 shares; outstanding: March 31, 2021 – 42,104; December 31, 2020 – 41,973)	42,104		41,973
Additional paid-in capital	22,306		17,558
Retained earnings	534,059		522,599
Accumulated other comprehensive loss	(39,824)		(41,433)
Non-controlling interest	174		141
Total shareholders’ equity	558,819		540,838
Total liabilities and shareholders’ equity	$	1,893,252	$	1,874,863

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)


	Quarter Ended March 31,
(in thousands, except per share amounts)	2021		2020
Product revenue	$	299,053	$	330,687
Service revenue	142,211		155,736
Total revenue	441,264		486,423
Cost of products	(107,325)		(121,587)
Cost of services	(71,184)		(80,462)
Total cost of revenue	(178,509)		(202,049)
Gross profit	262,755		284,374
Selling, general and administrative expense	(212,436)		(237,204)
Restructuring and integration expense	(14,313)		(17,654)
Asset impairment charges	—		(90,330)
Operating income (loss)	36,006		(60,814)
Interest expense	(4,524)		(6,999)
Other income	2,033		4,472
Income (loss) before income taxes	33,515		(63,341)
Income tax (provision) benefit	(9,190)		3,210
Net income (loss)	24,325		(60,131)
Net income attributable to non-controlling interest	(33)		—
Net income (loss) attributable to Deluxe	$	24,292	$	(60,131)
Total comprehensive income (loss)	$	25,934	$	(72,138)
Comprehensive income (loss) attributable to Deluxe	25,901		(72,138)
Basic earnings (loss) per share	0.58		(1.43)
Diluted earnings (loss) per share	0.57		(1.45)

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)


(in thousands)	Common shares	Common shares par value		Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Non-controlling interest		Total
Balance, December 31, 2020	41,973	$	41,973	$	17,558	$	522,599	$	(41,433)	$	141	$	540,838
Net income	—	—		—		24,292		—		33		24,325
Cash dividends ($0.30 per share)	—	—		—		(12,832)		—		—		(12,832)
Common shares issued	194	194		847		—		—		—		1,041
Common shares retired	(63)	(63)		(2,298)		—		—		—		(2,361)
Employee share-based compensation	—	—		6,199		—		—		—		6,199
Other comprehensive income	—	—		—		—		1,609		—		1,609
Balance, March 31, 2021	42,104	$	42,104	$	22,306	$	534,059	$	(39,824)	$	174	$	558,819


(in thousands)	Common shares	Common shares par value		Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Total
Balance, December 31, 2019	42,126	$	42,126	$	4,086	$	572,596	$	(47,947)	$	570,861
Net loss	—	—		—		(60,131)		—		(60,131)
Cash dividends ($0.30 per share)	—	—		—		(12,861)		—		(12,861)
Common shares issued	81	81		1,801		—		—		1,882
Common shares repurchased	(499)	(499)		(9,767)		(3,734)		—		(14,000)
Other common shares retired	(17)	(17)		(779)		—		—		(796)
Employee share-based compensation	—	—		4,659		—		—		4,659
Adoption of Accounting Standards Update No. 2016-13	—	—		—		(3,640)		—		(3,640)
Other comprehensive loss	—	—		—		—		(12,007)		(12,007)
Balance, March 31, 2020	41,691	$	41,691	$	—	$	492,230	$	(59,954)	$	473,967

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Quarter Ended March 31,
(in thousands)	2021		2020
Cash flows from operating activities:
Net income (loss)	$	24,325	$	(60,131)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	4,516		4,919
Amortization of intangibles	23,264		23,511
Operating lease expense	4,576		3,933
Asset impairment charges	—		90,330
Amortization of prepaid product discounts	7,440		7,077
Deferred income taxes	5,245		(9,129)
Employee share-based compensation expense	6,742		3,618
Other non-cash items, net	2,418		8,439
Changes in assets and liabilities:
Trade accounts receivable	23,122		3,575
Inventories and supplies	1,042		(3,165)
Other current assets	(19,711)		(7,403)
Non-current assets	(9,868)		(917)
Accounts payable	(3,543)		(10,145)
Prepaid product discount payments	(9,590)		(7,321)
Other accrued and non-current liabilities	(20,397)		(20,723)
Net cash provided by operating activities	39,581		26,468
Cash flows from investing activities:
Purchases of capital assets	(21,670)		(14,269)
Purchases of customer funds marketable securities	(29)		(34)
Proceeds from customer funds marketable securities	29		34
Other	(180)		354
Net cash used by investing activities	(21,850)		(13,915)
Cash flows from financing activities:
Proceeds from issuing long-term debt	5,000		309,000
Payments on long-term debt	(5,000)		(52,500)
Net change in customer funds obligations	1,659		(19,407)
Proceeds from issuing shares under employee plans	673		1,736
Employee taxes paid for shares withheld	(2,360)		(757)
Payments for common shares repurchased	—		(14,000)
Cash dividends paid to shareholders	(12,932)		(12,714)
Other	(1,271)		(202)
Net cash (used) provided by financing activities	(14,231)		211,156
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents	1,606		(12,717)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents	5,106		210,992
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year	229,409		174,811
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3)	$	234,515	$	385,803

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 March 31, 2021, the consolidated statements of comprehensive income (loss) for the quarters ended March 31, 2021 and 2020, the consolidated statements of shareholders’ equity for the quarters ended March 31, 2021 and 2020 and the consolidated statements of cash flows for the quarters ended March 31, 2021 and 2020 are unaudited. The consolidated balance sheet as of December 31, 2020 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, 2020 (the 2020 Form 10-K).

The preparation of our consolidated financial statements requires us to make certain estimates and assumptions affecting the amounts reported in the consolidated financial statements and related notes. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, including the estimated impact of extraordinary events, such as the novel coronavirus (COVID-19) pandemic, the results of which form the basis for making judgments about the carrying values of our assets, liabilities, revenues and expenses and the related disclosure of contingent 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.

Comparability – During the second quarter of 2020, we identified certain misstatements in our consolidated statement of cash flows for the quarter ended March 31, 2020. Within cash flows from financing activities, proceeds from issuing long-term debt and payments on long-term debt did not properly reflect the borrowing and payment activity that occurred during the quarter. Additionally, we identified a misstatement related to the presentation of unpaid capital expenditures, which impacted the amount reported for the change in accounts payable within cash provided by operating activities and the amount reported for purchases of capital assets within investing activities.

We assessed the materiality of these misstatements on prior period 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 misstatements were 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 misstatements by revising the consolidated financial statements appearing herein. The revisions had no impact on total assets, total liabilities, shareholders' equity or net income.

The impact of the revisions on the consolidated statement of cash flows for the quarter ended March 31, 2020 was as follows:


(in thousands)	Previously reported		Adjustment		Revised
Accounts payable	$	(18,059)	$	7,914	$	(10,145)
Net cash provided by operating activities	18,554		7,914		26,468
Purchases of capital assets	(6,355)		(7,914)		(14,269)
Net cash used by investing activities	(6,001)		(7,914)		(13,915)
Proceeds from issuing long-term debt	1,011,000		(702,000)		309,000
Payments on long-term debt	(754,500)		702,000		(52,500)
Net cash provided by financing activities	211,156		—		211,156
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents	$	210,992	$	—	$	210,992


DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts)


NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update No. 2019-12, Simplifying the Accounting for Income Taxes. This standard addressed several specific areas of accounting for income taxes. We adopted this standard on January 1, 2021. Portions of the standard were adopted prospectively and certain aspects were required to be adopted using the modified retrospective approach. Adoption of this standard did not require an adjustment to retained earnings and did not 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 allowances for uncollectible accounts included within trade accounts receivable were as follows for the quarters ended March 31, 2021 and 2020:


	Quarter Ended March 31,
(in thousands)	2021		2020
Balance, beginning of year	$	6,428	$	4,985
Bad debt (benefit) expense	(649)		1,059
Write-offs and other	(900)		(2,098)
Balance, end of period	$	4,879	$	3,946

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


(in thousands)	March 31, 2021		December 31, 2020
Raw materials	$	5,415	$	5,412
Semi-finished goods	7,916		7,943
Finished goods	31,464		33,513
Supplies	5,263		5,010
Reserve for excess and obsolete items	(12,939)		(11,748)
Inventories and supplies	$	37,119	$	40,130


DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts)

Changes in the reserve for excess and obsolete items were as follows for the quarters ended March 31, 2021 and 2020:


	Quarter Ended March 31,
(in thousands)	2021		2020
Balance, beginning of year	$	11,748	$	6,600
Amounts charged to expense	2,013		88
Write-offs	(822)		(335)
Balance, end of period	$	12,939	$	6,353

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


	March 31, 2021
(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Funds held for customers:(1)
Domestic money market fund	$	12,000	$	—	$	—	$	12,000
Canadian and provincial government securities	9,722		—		(311)		9,411
Canadian guaranteed investment certificate	3,980		—		—		3,980
Available-for-sale debt securities	$	25,702	$	—	$	(311)	$	25,391

(1) Funds held for customers, as reported on the consolidated balance sheet as of March 31, 2021, also included cash of $97,075.


	December 31, 2020
(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Funds held for customers:(1)
Domestic money market fund	$	15,000	$	—	$	—	$	15,000
Canadian and provincial government securities	9,566		—		(33)		9,533
Canadian guaranteed investment certificate	3,929		—		—		3,929
Available-for-sale debt securities	$	28,495	$	—	$	(33)	$	28,462

(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2020, also included cash of $91,287.

Expected maturities of available-for-sale debt securities as of March 31, 2021 were as follows:


(in thousands)	Fair value
Due in one year or less	$	14,550
Due in two to five years	7,971
Due in six to ten years	2,870
Available-for-sale debt securities	$	25,391

Further information regarding the fair value of available-for-sale debt securities can be found in Note 7.


DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts)

Revenue in excess of billings – Revenue in excess of billings was comprised of the following:


(in thousands)	March 31, 2021		December 31, 2020
Conditional right to receive consideration	$	20,072	$	13,950
Unconditional right to receive consideration(1)	7,583		3,667
Revenue in excess of billings	$	27,655	$	17,617

(1) Represents revenues that are earned but not currently billable under the related contract terms. Trade accounts receivable on the consolidated balance sheets included unbilled receivables of $19,295 as of March 31, 2021 and $21,319 as of December 31, 2020.

Intangibles – Intangibles were comprised of the following:


	March 31, 2021						December 31, 2020
(in thousands)	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Amortizable intangibles:
Internal-use software	$	397,675	$	(314,125)	$	83,550	$	380,144	$	(303,422)	$	76,722
Customer lists/relationships	366,241		(212,425)		153,816		352,895		(202,428)		150,467
Software to be sold	36,900		(24,941)		11,959		36,900		(23,884)		13,016
Technology-based intangibles	33,813		(29,163)		4,650		33,813		(27,613)		6,200
Trade names	30,230		(30,053)		177		30,281		(29,926)		355
Intangibles	$	864,859	$	(610,707)	$	254,152	$	834,033	$	(587,273)	$	246,760

Amortization of intangibles was $23,264 for the quarter ended March 31, 2021 and $23,511 for the quarter ended March 31, 2020. Based on the intangibles in service as of March 31, 2021, estimated future amortization expense is as follows:


(in thousands)	Estimated amortization expense
Remainder of 2021	$	65,583
2022	68,285
2023	48,720
2024	23,206
2025	17,327

The following intangibles were acquired during the quarter ended March 31, 2021:


(in thousands)	Amount		Weighted-average amortization period (in years)
Internal-use software	$	17,321	3
Customer lists/relationships	13,302		8
Acquired intangibles	$	30,623	5


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, 2021 were as follows:


(in thousands)	Payments		Cloud Solutions		Promotional Solutions		Checks		Total
Balance, December 31, 2020:
Goodwill, gross	$	168,165	$	432,984	$	252,864	$	434,812	$	1,288,825
Accumulated impairment charges	—		(362,058)		(189,923)		—		(551,981)
Goodwill, net of accumulated impairment charges	168,165		70,926		62,941		434,812		736,844
Currency translation adjustment	—		—		18		—		18
Balance, March 31, 2021	$	168,165	$	70,926	$	62,959	$	434,812	$	736,862

Balance, March 31, 2021:
Goodwill, gross	$	168,165	$	432,984	$	252,882	$	434,812	$	1,288,843
Accumulated impairment charges	—		(362,058)		(189,923)		—		(551,981)
Goodwill, net of accumulated impairment charges	$	168,165	$	70,926	$	62,959	$	434,812	$	736,862

Other non-current assets – Other non-current assets were comprised of the following:


(in thousands)	March 31, 2021		December 31, 2020
Postretirement benefit plan asset	$	72,775	$	71,208
Prepaid product discounts	51,044		50,602
Cloud computing arrangements	38,249		29,242
Loans and notes receivable from distributors, net of allowances for doubtful accounts(1)	27,182		35,068
Deferred sales commissions(2)	15,461		9,199
Other	13,124		13,360
Other non-current assets	$	217,835	$	208,679

(1) Amount Includes the non-current portion of loans and notes receivable. The current portion of these receivables is included in other current assets on the consolidated balance sheets and was $1,704 as of March 31, 2021 and $2,008 as of December 31, 2020.

(2) Amortization of deferred sales commissions was $972 for the quarter ended March 31, 2021 and $882 for the quarter ended March 31, 2020.

Changes in the allowances for uncollectible accounts related to loans and notes receivable from distributors were as follows for the quarters ended March 31, 2021 and 2020:


	Quarter Ended March 31,
(in thousands)	2021		2020
Balance, beginning of year	$	3,995	$	284
Adoption of ASU No. 2016-13	—		4,749
Bad debt (benefit) expense	(634)		5,382
Balance, end of period	$	3,361	$	10,415

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, 2021 or December 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


DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts)

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 distributors, including the current portion, by credit quality indicator and by year of origination, as of March 31, 2021. There were no write-offs or recoveries recorded during the quarter ended March 31, 2021.


	Loans and notes receivable from distributors amortized cost basis by origination year
(in thousands)	2020		2019		2018		2017		Prior		Total
Risk rating:
1-2 internal grade	$	1,310	$	587	$	14,546	$	11,744	$	1,481	$	29,668
3-4 internal grade	—		2,579		—		—		—		2,579
Loans and notes receivable	$	1,310	$	3,166	$	14,546	$	11,744	$	1,481	$	32,247

Changes in prepaid product discounts during the quarters ended March 31, 2021 and 2020 were as follows:


	Quarter Ended March 31,
(in thousands)	2021		2020
Balance, beginning of year	$	50,602	$	51,145
Additions(1)	7,890		2,470
Amortization	(7,440)		(7,077)
Other	(8)		(544)
Balance, end of period	$	51,044	$	45,994

(1) Prepaid product discounts are generally accrued upon contract execution. Cash payments for prepaid product discounts were $9,590 for the quarter ended March 31, 2021 and $7,321 for the quarter ended March 31, 2020.

Accrued liabilities – Accrued liabilities were comprised of the following:


(in thousands)	March 31, 2021		December 31, 2020
Deferred revenue(1)	$	49,469	$	42,104
Employee cash bonuses, including sales incentives	17,005		21,090
Prepaid product discounts due within one year	12,640		14,365
Operating lease liabilities	10,914		11,589
Customer rebates	7,046		8,179
Other	77,849		79,856
Accrued liabilities	$	174,923	$	177,183

(1) $16,121 of the December 31, 2020 amount was recognized as revenue during the quarter ended March 31, 2021.

Supplemental cash flow information – The reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents to the consolidated balance sheets was as follows:


(in thousands)	March 31, 2021		March 31, 2020
Cash and cash equivalents	$	125,440	$	310,146
Restricted cash and restricted cash equivalents included in funds held for customers	109,075		75,657
Total cash, cash equivalents, restricted cash and restricted cash equivalents	$	234,515	$	385,803


DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts)


NOTE 4: EARNINGS (LOSS) PER SHARE

The following table reflects the calculation of basic and diluted earnings (loss) per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted earnings (loss) per share because their effect would have been antidilutive.


	Quarter Ended March 31,
(in thousands, except per share amounts)	2021		2020
Earnings (loss) per share – basic:
Net income (loss)	$	24,325	$	(60,131)
Net income attributable to non-controlling interest	(33)		—
Net income (loss) attributable to Deluxe	24,292		(60,131)
Income allocated to participating securities	(19)		(21)
Income (loss) attributable to Deluxe available to common shareholders	$	24,273	$	(60,152)
Weighted-average shares outstanding	42,046		42,028
Earnings (loss) per share – basic	$	0.58	$	(1.43)

Earnings (loss) per share – diluted:
Net income (loss)	$	24,325	$	(60,131)
Net income attributable to non-controlling interest	(33)		—
Net income (loss) attributable to Deluxe	24,292		(60,131)
Income allocated to participating securities	—		(21)
Re-measurement of share-based awards classified as liabilities	—		(775)
Income (loss) attributable to Deluxe available to common shareholders	$	24,292	$	(60,927)
Weighted-average shares outstanding	42,046		42,028
Dilutive impact of potential common shares	458		37
Weighted-average shares and potential common shares outstanding	42,504		42,065
Earnings (loss) per share – diluted	$	0.57	$	(1.45)
Antidilutive options excluded from calculation	2,423		2,214


DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts)


NOTE 5: OTHER COMPREHENSIVE INCOME (LOSS)

Reclassification adjustments – Information regarding amounts reclassified from accumulated other comprehensive loss to net income (loss) was as follows:


Accumulated other comprehensive loss components	Amounts reclassified from accumulated other comprehensive loss				Affected line item in consolidated statements of comprehensive income (loss)
	Quarter Ended March 31,
(in thousands)	2021		2020
Realized (loss) gain on interest rate swap	$	(334)	$	93		Interest expense
Tax benefit (expense)	87		(24)			Income tax (provision) benefit
Realized (loss) gain on interest rate swap, net of tax	(247)		69			Net income (loss)
Amortization of postretirement benefit plan items:
Prior service credit	355		355			Other income
Net actuarial loss	(407)		(575)			Other income
Total amortization	(52)		(220)			Other income
Tax (expense) benefit	(31)		12			Income tax (provision) benefit
Amortization of postretirement benefit plan items, net of tax	(83)		(208)			Net income (loss)
Total reclassifications, net of tax	$	(330)	$	(139)

Accumulated other comprehensive loss – Changes in the components of accumulated other comprehensive loss during the quarter ended March 31, 2021 were as follows:


(in thousands)	Postretirement benefit plans		Net unrealized loss on available-for-sale debt securities(1)		Net unrealized loss on cash flow hedge(2)		Currency translation adjustment		Accumulated other comprehensive loss
Balance, December 31, 2020	$	(21,956)	$	(90)	$	(5,351)	$	(14,036)	$	(41,433)
Other comprehensive (loss) income before reclassifications	—		(204)		477		1,006		1,279
Amounts reclassified from accumulated other comprehensive loss	83		—		247		—		330
Net current-period other comprehensive income (loss)	83		(204)		724		1,006		1,609
Balance, March 31, 2021	$	(21,873)	$	(294)	$	(4,627)	$	(13,030)	$	(39,824)

(1) Other comprehensive loss before reclassifications is net of an income tax benefit of $71.

(2) Other comprehensive income before reclassifications is net of income tax expense of $168.


DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts)


NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS

As part of our interest rate risk management strategy, we entered into an interest rate swap in July 2019, which we designated as a cash flow hedge, to mitigate variability in interest payments on a portion of the amount drawn under our revolving credit facility (Note 11). The interest rate swap, which terminates in March 2023 when our revolving credit facility matures, effectively converts $200,000 of variable rate debt to a fixed rate of 1.798%. Changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive loss on the consolidated balance sheets and are subsequently reclassified to interest expense as interest payments are made on the variable-rate debt. The fair value of the interest rate swap was $6,231 as of March 31, 2021 and $7,210 as of December 31, 2020 and was included in other non-current liabilities on the consolidated balance sheets. The fair value of this derivative is calculated based on the prevailing LIBOR rate curve on the date of measurement. The cash flow hedge was fully effective as of March 31, 2021 and December 31, 2020 and its impact on consolidated net income (loss) and our consolidated statements of cash flows was not significant. We also do not expect the amount to be reclassified to interest expense over the next 12 months to be significant.


NOTE 7: FAIR VALUE MEASUREMENTS

Our policies on impairment of goodwill and indefinite-lived intangible assets and impairment of long-lived assets and amortizable intangibles explain our methodology for assessing impairment of these assets and can be found under the caption "Note 1: Significant Accounting Policies" in the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.

2020 asset impairment charges – During the quarter ended March 31, 2020, we concluded that a triggering event had occurred for 2 of our reporting units as a result of the COVID-19 pandemic. As such, we completed goodwill impairment analyses for these reporting units as of March 31, 2020. Our analyses indicated that the goodwill of our Promotional Solutions reporting unit was partially impaired and the goodwill of our Cloud Solutions Web Hosting reporting unit was fully impaired. As such, we recorded goodwill impairment charges of $63,356 and $4,317, respectively. The impairment charges were measured as the amount by which the reporting units' carrying values exceeded their estimated fair values, limited to the carrying amount of goodwill. After the impairment charges, $62,785 of goodwill remained in the Promotional Solutions reporting unit as of the measurement date.

Also as a result of the impacts of the COVID-19 pandemic, we assessed for impairment certain long-lived assets of our Cloud Solutions Web Hosting reporting unit as of March 31, 2020. As a result of these assessments, we recorded asset impairment charges of $17,678, primarily related to customer list, software and trade name intangible assets. With the exception of certain internal-use software assets, we determined that the assets were fully impaired. We utilized the discounted value of estimated future cash flows to estimate the fair value of the asset group. In our analysis, we assumed a revenue decline of 31% and a gross margin decline of 5.2 points in 2020, as well as a discount rate of 9%.

During the first quarter of 2020, we assessed for impairment the carrying value of an asset group related to a small business distributor that we previously purchased. Our assessment was the result of customer attrition during the quarter that impacted our projections of future cash flows. Based on our estimate of discounted future cash flows, we determined that the asset group was partially impaired as of February 29, 2020, and we recorded an asset impairment charge of $2,752, reducing the carrying value of the related customer list intangible asset. In calculating the estimated fair value of the asset group, we assumed no revenue growth, a 1.9 point improvement in gross margin and a discount rate of 11%. Also during the first quarter of 2020, we recorded asset impairment charges of $2,227 related to internal-use software and a small business distributor held for sale. Customer attrition in the business utilizing the software caused us to evaluate the asset for impairment, and this analysis indicated that the software was fully impaired. During the first quarter of 2020, we agreed to sales terms for the small business distributor. Based on the negotiated sales price, we recorded an asset impairment charge to write-down the carrying value of the asset group to its fair value less costs to sell.


DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts)

Information regarding the asset impairment analyses completed during the quarter ended March 31, 2020 was as follows:


			Fair value measurements using
	Fair value as of measurement date		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs		Impairment charge
(in thousands)			(Level 1)		(Level 2)		(Level 3)
Intangible assets (Cloud Solutions Web Hosting reporting unit)(1)	$	2,172	$	—	$	—	$	2,172	$	17,678
Small business distributor	7,622		—		—		7,622		2,752
Other assets	1,412		—		—		1,412		2,227
Goodwill									67,673
Total									$	90,330

(1) The impairment charge consisted of $8,397 related to customer lists, $6,932 related to internal-use software and $2,349 related to other intangible assets.

Recurring fair value measurements – Funds held for customers included available-for-sale debt securities (Note 3). These securities included a money market fund that is traded in an active market, a mutual fund investment that invests in Canadian and provincial government securities, and an investment in a Canadian guaranteed investment certificate (GIC) with a maturity of 2<

Form: 10-Q

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