May 9, 2023 - 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, 2023


☐			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.)
801 S. Marquette Ave.	Minneapolis	MN	55402-2807
(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 26, 2023 was 43,460,550.


PART I – FINANCIAL INFORMATION


Item 1. FINANCIAL STATEMENTS


DELUXE CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited)


(in thousands, except share par value)	March 31, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents, including securities carried at fair value of $5,000 as of December 31, 2022	$	24,622	$	40,435
Trade accounts receivable, net of allowance for credit losses	221,894		206,617
Inventories and supplies	53,923		52,267
Funds held for customers, including securities carried at fair value of $8,370 and $8,126, respectively	157,380		302,291
Prepaid expenses	34,242		36,642
Revenue in excess of billings	35,932		38,761
Other current assets	26,871		27,024
Total current assets	554,864		704,037
Deferred income taxes	1,263		1,956
Long-term investments	63,989		47,783
Property, plant and equipment, net of accumulated depreciation of $350,142 and $379,988, respectively	125,459		124,894
Operating lease assets	56,448		47,132
Intangibles, net of accumulated amortization of $801,311 and $823,589, respectively	435,572		458,979
Goodwill	1,430,561		1,431,385
Other non-current assets	272,755		260,354
Total assets	$	2,940,911	$	3,076,520
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	158,063	$	157,055
Funds held for customers	156,652		305,138
Accrued liabilities	185,708		218,404
Current portion of long-term debt	78,845		71,748
Total current liabilities	579,268		752,345
Long-term debt	1,607,855		1,572,528
Operating lease liabilities	58,153		48,925
Deferred income taxes	39,354		45,510
Other non-current liabilities	60,632		52,988
Commitments and contingencies (Note 13)
Shareholders' equity:
Common shares $1 par value (authorized: 500,000 shares; outstanding: March 31, 2023 – 43,421; December 31, 2022 – 43,204)	43,421		43,204
Additional paid-in capital	83,800		79,234
Retained earnings	507,992		518,635
Accumulated other comprehensive loss	(40,007)		(37,264)
Non-controlling interest	443		415
Total shareholders’ equity	595,649		604,224
Total liabilities and shareholders’ equity	$	2,940,911	$	3,076,520

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


	Quarter Ended March 31,
(in thousands, except per share amounts)	2023		2022
Product revenue	$	310,226	$	317,303
Service revenue	235,139		238,712
Total revenue	545,365		556,015
Cost of products	(118,436)		(114,361)
Cost of services	(132,227)		(134,833)
Total cost of revenue	(250,663)		(249,194)
Gross profit	294,702		306,821
Selling, general and administrative expense	(247,630)		(259,699)
Restructuring and integration expense	(12,941)		(16,244)

Operating income	34,131		30,878
Interest expense	(30,016)		(20,324)
Other income, net	2,424		2,004
Income before income taxes	6,539		12,558
Income tax provision	(3,759)		(2,878)
Net income	2,780		9,680
Net income attributable to non-controlling interest	(28)		(36)
Net income attributable to Deluxe	$	2,752	$	9,644
Total comprehensive income	$	37	$	12,147
Comprehensive income attributable to Deluxe	9		12,111
Basic earnings per share	0.06		0.23
Diluted earnings per share	0.06		0.22

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, 2022	43,204	$	43,204	$	79,234	$	518,635	$	(37,264)	$	415	$	604,224
Net income	—	—		—		2,752		—		28		2,780
Cash dividends ($0.30 per share)	—	—		—		(13,395)		—		—		(13,395)
Common shares issued	324	324		617		—		—		—		941
Common shares retired	(107)	(107)		(1,927)		—		—		—		(2,034)
Employee share-based compensation	—	—		5,876		—		—		—		5,876
Other comprehensive loss	—	—		—		—		(2,743)		—		(2,743)
Balance, March 31, 2023	43,421	$	43,421	$	83,800	$	507,992	$	(40,007)	$	443	$	595,649


(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, 2021	42,679	$	42,679	$	57,368	$	505,763	$	(31,492)	$	280	$	574,598
Net income	—	—		—		9,644		—		36		9,680
Cash dividends ($0.30 per share)	—	—		—		(13,282)		—		—		(13,282)
Common shares issued	379	379		1,152		—		—		—		1,531
Common shares retired	(135)	(135)		(4,026)		—		—		—		(4,161)
Employee share-based compensation	—	—		8,182		—		—		—		8,182
Other comprehensive income	—	—		—		—		2,467		—		2,467
Balance, March 31, 2022	42,923	$	42,923	$	62,676	$	502,125	$	(29,025)	$	316	$	579,015

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Quarter Ended March 31,
(in thousands)	2023		2022
Cash flows from operating activities:
Net income	$	2,780	$	9,680
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation	5,303		5,438
Amortization of intangibles	38,217		36,159
Operating lease expense	5,389		5,570
Amortization of prepaid product discounts	8,513		8,924
Deferred income taxes	(6,934)		(7,524)
Employee share-based compensation expense	5,866		8,142

Other non-cash items, net	10,573		8,213
Changes in assets and liabilities:
Trade accounts receivable	(18,355)		12,248
Inventories and supplies	(2,972)		(893)
Other current assets	5,019		(12,731)
Payments for cloud computing arrangement implementation costs	(3,701)		(6,391)
Other non-current assets	(5,521)		(3,082)
Accounts payable	5,193		(5,003)
Prepaid product discount payments	(7,383)		(7,859)
Other accrued and non-current liabilities	(48,693)		(16,626)
Net cash (used) provided by operating activities	(6,706)		34,265
Cash flows from investing activities:
Purchases of capital assets	(25,518)		(20,844)


Other	34		515
Net cash used by investing activities	(25,484)		(20,329)
Cash flows from financing activities:
Proceeds from issuing long-term debt and swingline loans	217,500		146,500
Payments on long-term debt and swingline loans	(175,938)		(137,938)

Net change in customer funds obligations	(145,621)		(99,240)

Employee taxes paid for shares withheld	(2,034)		(4,161)
Cash dividends paid to shareholders	(13,616)		(13,317)
Other	(2,579)		(1,812)
Net cash used by financing activities	(122,288)		(109,968)
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents	612		1,320
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents	(153,866)		(94,712)
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year	337,415		285,491
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3)	$	183,549	$	190,779

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, 2023, the consolidated statements of comprehensive income for the quarters ended March 31, 2023 and 2022, the consolidated statements of shareholders’ equity for the quarters ended March 31, 2023 and 2022 and the consolidated statements of cash flows for the quarters ended March 31, 2023 and 2022 are unaudited. The consolidated balance sheet as of December 31, 2022 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 items discussed in the notes below. Interim results are not necessarily indicative of results for a full year or future results. 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, 2022 (the "2022 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, 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.

Comparability – The consolidated statement of cash flows for the quarter ended March 31, 2022 has been modified to conform to the current year presentation. We included proceeds from issuing shares within other financing activities. Previously, this amount was shown separately.


NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, Troubled Debt Restructurings and Vintage Disclosures. This standard modifies the accounting for troubled debt restructurings by creditors and modifies certain disclosure requirements. We adopted this standard on January 1, 2023 and elected to apply it prospectively to modifications occurring on or after January 1, 2023. Adoption of this standard did not impact our financial position or results of operations for the quarter ended March 31, 2023.

In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU No 2021-01, Reference Rate Reform (Topic 848): Scope, which clarified the scope and application of the original guidance. Effective March 20, 2023, we modified our existing credit facility and our September 2022 interest rate swap agreement (Note 7) to utilize the Secured Overnight Financing Rate (SOFR) as the reference rate in the agreements. In accounting for these modifications, we adopted the reference rate reform guidance on a prospective basis as allowed under the provisions of ASU No. 2022-06, Deferral of the Sunset Date of Topic 848. Adoption of these standards did not have a material impact on our consolidated financial statements.


NOTE 3: SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Trade accounts receivable – Net trade accounts receivable was comprised of the following:


(in thousands)	March 31, 2023		December 31, 2022
Trade accounts receivable – gross	$	226,718	$	210,799
Allowance for credit losses	(4,824)		(4,182)
Trade accounts receivable – net(1)	$	221,894	$	206,617

(1) Includes unbilled receivables of $54,336 as of March 31, 2023 and $43,902 as of December 31, 2022.


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

Changes in the allowance for credit losses for the quarters ended March 31, 2023 and 2022 were as follows:


	Quarter Ended March 31,
(in thousands)	2023		2022
Balance, beginning of year	$	4,182	$	4,130
Bad debt expense	1,466		625
Write-offs and other	(824)		(556)
Balance, end of period	$	4,824	$	4,199

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


(in thousands)	March 31, 2023		December 31, 2022
Raw materials	$	11,326	$	11,563
Semi-finished goods	5,973		7,777
Finished goods	37,240		32,938
Supplies	6,866		6,389
Reserve for excess and obsolete items	(7,482)		(6,400)
Inventories and supplies, net of reserve	$	53,923	$	52,267

Changes in the reserve for excess and obsolete items were as follows for the quarters ended March 31, 2023 and 2022:


	Quarter Ended March 31,
(in thousands)	2023		2022
Balance, beginning of year	$	6,400	$	5,132
Amounts charged to expense	1,334		773
Write-offs and other	(252)		(526)
Balance, end of period	$	7,482	$	5,379

Available-for-sale debt securities – Available-for-sale debt securities were comprised of the following:


	March 31, 2023
(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value


Funds held for customers:(1)
Canadian and provincial government securities	$	9,269	$	—	$	(899)	$	8,370
Available-for-sale debt securities	$	9,269	$	—	$	(899)	$	8,370

(1) Funds held for customers, as reported on the consolidated balance sheet as of March 31, 2023, also included cash of $149,010.


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


	December 31, 2022
(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Cash equivalents:
Domestic money market fund	$	5,000	$	—	$	—	$	5,000
Funds held for customers:(1)

Canadian and provincial government securities	9,190		—		(1,064)		8,126
Available-for-sale debt securities	$	14,190	$	—	$	(1,064)	$	13,126

(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2022, also included cash of $294,165.

Expected maturities of available-for-sale debt securities as of March 31, 2023 were as follows:


(in thousands)	Fair value
Due in one year or less	$	2,888
Due in two to five years	2,461
Due in six to ten years	3,021
Available-for-sale debt securities	$	8,370

Further information regarding the fair value of available-for-sale debt securities can be found in Note 8.

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


(in thousands)	March 31, 2023		December 31, 2022
Conditional right to receive consideration	$	20,928	$	26,520
Unconditional right to receive consideration(1)	15,004		12,241
Revenue in excess of billings	$	35,932	$	38,761

(1) Represents revenues that are earned but not currently billable under the related contract terms.

Intangibles – Intangibles were comprised of the following:


	March 31, 2023						December 31, 2022
(in thousands)	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Internal-use software	$	497,102	$	(365,240)	$	131,862	$	529,306	$	(395,514)	$	133,792
Customer lists/relationships	491,951		(323,960)		167,991		497,882		(312,986)		184,896
Technology-based intangibles	97,633		(47,529)		50,104		99,613		(47,478)		52,135
Partner relationships	73,930		(9,411)		64,519		74,682		(9,094)		65,588
Trade names	39,367		(22,217)		17,150		44,185		(26,510)		17,675
Software to be sold	36,900		(32,954)		3,946		36,900		(32,007)		4,893
Intangibles	$	1,236,883	$	(801,311)	$	435,572	$	1,282,568	$	(823,589)	$	458,979


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

Amortization of intangibles was $38,217 for the quarter ended March 31, 2023 and $36,159 for the quarter ended March 31, 2022. Based on the intangibles in service as of March 31, 2023, estimated future amortization expense is as follows:


(in thousands)	Estimated amortization expense
Remainder of 2023	$	97,717
2024	96,138
2025	66,435
2026	42,050
2027	32,746

In the normal course of business, we acquire and develop internal-use software. We also, at times, purchase customer list and partner relationship assets. The following intangibles were capitalized during the quarter ended March 31, 2023:


(in thousands)	Amount		Weighted-average amortization period (in years)
Internal-use software	$	16,918	3

Partner relationships	274		1
Acquired intangibles	$	17,192	3

Goodwill – Changes in goodwill by reportable segment and in total were as follows for the quarter ended March 31, 2023:


(in thousands)	Payments		Data Solutions		Promotional Solutions		Checks		Total
Balance, December 31, 2022:
Goodwill, gross	$	896,681	$	432,984	$	252,775	$	434,812	$	2,017,252
Accumulated impairment charges	—		(392,168)		(193,699)		—		(585,867)
Goodwill, net of accumulated impairment charges	896,681		40,816		59,076		434,812		1,431,385

Currency translation adjustment and other	(828)		—		4		—		(824)
Balance, March 31, 2023	$	895,853	$	40,816	$	59,080	$	434,812	$	1,430,561

Balance, March 31, 2023:
Goodwill, gross	$	895,853	$	432,984	$	252,779	$	434,812	$	2,016,428
Accumulated impairment charges	—		(392,168)		(193,699)		—		(585,867)
Goodwill, net of accumulated impairment charges	$	895,853	$	40,816	$	59,080	$	434,812	$	1,430,561


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

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


(in thousands)	March 31, 2023		December 31, 2022
Postretirement benefit plan asset	$	81,424	$	79,343
Cloud computing arrangement implementation costs	69,279		71,547
Prepaid product discounts	48,106		44,824
Deferred contract acquisition costs(1)	22,645		21,300
Assets held for sale(2)	13,355		—
Loans and notes receivable from distributors, net of allowance for credit losses(3)	12,959		13,259
Other	24,987		30,081
Other non-current assets	$	272,755	$	260,354

(1) Amortization of deferred contract acquisition costs was $2,367 for the quarter ended March 31, 2023 and $1,756 for the quarter ended March 31, 2022.

(2) Amount includes the non-current assets of our North American web hosting and logo design businesses that were held for sale as of March 31, 2023 (Note 6).

(3) 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 $992 as of March 31, 2023 and $961 as of December 31, 2022.

Changes in the allowance for credit losses related to loans and notes receivable from distributors were as follows for the quarters ended March 31, 2023 and 2022:


	Quarter Ended March 31,
(in thousands)	2023		2022
Balance, beginning of year	$	1,024	$	2,830
Bad debt (benefit) expense	(28)		81
Other	—		(402)
Balance, end of period	$	996	$	2,509

Past due receivables and those on non-accrual status were not significant as of March 31, 2023 or December 31, 2022.

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 distributors, including the current portion, by credit quality indicator and by year of origination, as of March 31, 2023. There were no write-offs or recoveries recorded during the quarter ended March 31, 2023.


	Loans and notes receivable from distributors amortized cost basis by origination year
(in thousands)	2020		2019		2018		Prior		Total
Risk rating:
1-2 internal grade	$	1,104	$	415	$	4,008	$	9,420	$	14,947
3-4 internal grade	—		—		—		—		—
Loans and notes receivable	$	1,104	$	415	$	4,008	$	9,420	$	14,947


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

Changes in prepaid product discounts during the quarters ended March 31, 2023 and 2022 were as follows:


	Quarter Ended March 31,
(in thousands)	2023		2022
Balance, beginning of year	$	44,824	$	56,527
Additions(1)	11,784		4,229
Amortization	(8,513)		(8,924)
Other	11		53
Balance, end of period	$	48,106	$	51,885

(1) Prepaid product discounts are generally accrued upon contract execution. Payments for prepaid product discounts were $7,383 for the quarter ended March 31, 2023 and $7,859 for the quarter ended March 31, 2022.

Accrued liabilities – Accrued liabilities were comprised of the following:


(in thousands)	March 31, 2023		December 31, 2022
Deferred revenue(1)	$	48,526	$	47,012
Employee bonuses, including sales incentives	17,161		57,398
Interest	16,415		7,314
Operating lease liabilities	14,259		12,780
Wages and payroll liabilities, including vacation	12,095		20,264
Customer rebates	10,059		12,153
Prepaid product discounts	8,580		4,179
Other	58,613		57,304
Accrued liabilities	$	185,708	$	218,404

(1) Revenue recognized for amounts included in deferred revenue at the beginning of the period was $18,683 for the quarter ended March 31, 2023 and $20,238 for the quarter ended March 31, 2022.

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, 2023		March 31, 2022
Cash and cash equivalents	$	24,622	$	44,059
Restricted cash and restricted cash equivalents included in funds held for customers	149,010		143,725
Cash and cash equivalents included in other current assets(1)	7,325		400
Non-current restricted cash included in other non-current assets	2,592		2,595
Total cash, cash equivalents, restricted cash and restricted cash equivalents	$	183,549	$	190,779
Non-cash investing activities:
Investment in joint venture(2)	$	18,392	$	—

(1) Represents the cash and cash equivalents of businesses held for sale as of each date. Our North American web hosting and logo design businesses were classified as held for sale as of March 31, 2023 (Note 6) and our Australian web hosting business was classified as held for sale as of March 31, 2022.

(2) In February 2023, we entered into a joint venture focused on launching and marketing a business payment distribution technology platform. We are committed to invest $20,000 over the next 3 years and we have option rights to acquire additional non-controlling ownership interests. During the quarter ended March 31, 2023, we recorded $18,392 for our investment in the joint venture and option rights.


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


NOTE 4: EARNINGS PER SHARE

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


	Quarter Ended March 31,
(in thousands, except per share amounts)	2023		2022
Earnings per share – basic:
Net income	$	2,780	$	9,680
Net income attributable to non-controlling interest	(28)		(36)
Net income attributable to Deluxe	2,752		9,644
Income allocated to participating securities	(10)		(10)
Income attributable to Deluxe available to common shareholders	$	2,742	$	9,634
Weighted-average shares outstanding	43,317		42,803
Earnings per share – basic	$	0.06	$	0.23

Earnings per share – diluted:
Net income	$	2,780	$	9,680
Net income attributable to non-controlling interest	(28)		(36)
Net income attributable to Deluxe	2,752		9,644
Income allocated to participating securities	(10)		(10)
Re-measurement of share-based awards classified as liabilities	(19)		(39)
Income attributable to Deluxe available to common shareholders	$	2,723	$	9,595
Weighted-average shares outstanding	43,317		42,803
Dilutive impact of potential common shares	344		429
Weighted-average shares and potential common shares outstanding	43,661		43,232
Earnings per share – diluted	$	0.06	$	0.22
Antidilutive options excluded from calculation	1,644		2,063


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


NOTE 5: OTHER COMPREHENSIVE INCOME

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


Accumulated other comprehensive loss components	Amounts reclassified from accumulated other comprehensive loss				Affected line item in consolidated statements of comprehensive income
	Quarter Ended March 31,
(in thousands)	2023		2022
Amortization of postretirement benefit plan items:
Prior service credit	$	355	$	355		Other income
Net actuarial loss	(568)		(225)			Other income
Total amortization	(213)		130			Other income
Tax benefit (expense)	16		(77)			Income tax provision
Amortization of postretirement benefit plan items, net of tax	(197)		53			Net income



Realized gain (loss) on cash flow hedges	570		(318)			Interest expense
Tax (expense) benefit	(152)		83			Income tax provision
Realized gain (loss) on cash flow hedges, net of tax	418		(235)			Net income

Total reclassifications, net of tax	$	221	$	(182)

Accumulated other comprehensive loss – Changes in the components of accumulated other comprehensive loss during the quarter ended March 31, 2023 were as follows:


(in thousands)	Postretirement benefit plans		Net unrealized loss on debt securities(1)		Net unrealized gain (loss) on cash flow hedges(2)		Currency translation adjustment		Accumulated other comprehensive loss
Balance, December 31, 2022	$	(26,872)	$	(909)	$	2,593	$	(12,076)	$	(37,264)
Other comprehensive income (loss) before reclassifications	—		123		(2,872)		227		(2,522)
Amounts reclassified from accumulated other comprehensive loss	197		—		(418)		—		(221)
Net current-period other comprehensive income (loss)	197		123		(3,290)		227		(2,743)
Balance, March 31, 2023	$	(26,675)	$	(786)	$	(697)	$	(11,849)	$	(40,007)

(1) Other comprehensive income before reclassifications is net of income tax expense of $43.

(2) Other comprehensive loss before reclassifications is net of an income tax benefit of $1,045.


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


NOTE 6: DIVESTITURE

In January 2023, we entered into an agreement for the sale of our North American web hosting and logo design businesses for an aggregate sales price of $42,000, plus up to $10,000 of additional proceeds contingent upon performance against certain conditions following the closing. We believe that the sale of these businesses allows us to focus our resources on the key growth areas of payments and data, while allowing us to optimize our operations. These businesses generated annual revenue of approximately $66,000 during 2022, primarily in our Data Solutions segment. We anticipate that the sale will close during May 2023 and that we will recognize a gain on the sale. The assets and liabilities of these businesses were classified as held for sale in the consolidated balance sheet as of March 31, 2023 within other current assets, other non-current assets and accrued liabilities. The amounts of these assets and liabilities were not significant to our consolidated balance sheet.


NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

As part of our interest rate risk management strategy, we entered into interest rate swaps, which we designated as cash flow hedges, to mitigate variability in interest payments on a portion of our variable-rate debt (Note 12). In March 2023, we modified our September 2022 interest rate swap agreement to utilize SOFR as the reference rate in the agreement. Information regarding our accounting for this modification can be found in Note 2. Our derivative instruments were comprised of the following:


							March 31, 2023		December 31, 2022
(in thousands)	Notional amount		Interest rate		Maturity	Balance sheet location	Fair value asset / (liability)		Fair value asset / (liability)
March 2023 interest rate swap:
	$	200,000	4.003	%	March 2026	Other non-current liabilities	$	(888)	—
September 2022 interest rate swap:
	300,000		3.990	%	September 2025	Other non-current assets	—		2,409
						Other non-current liabilities	(7)
July 2019 interest rate swap:
	200,000		1.798	%	March 2023	Other current assets	—		1,184

Changes in the fair values of the interest rate swaps 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 values of the derivatives are calculated based on the applicable reference rate curve on the date of measurement. The cash flow hedges were fully effective as of March 31, 2023 and December 31, 2022, and their impact on consolidated net income and the consolidated statements of cash flows was not significant. We also expect that the amount that will be reclassified to interest expense during the next 12 months will not be significant.


NOTE 8: FAIR VALUE MEASUREMENTS

Funds held for customers and cash and cash equivalents included available-for-sale debt securities (Note 3). These securities included a mutual fund investment that invests in Canadian and provincial government securities and as of December 31, 2022, included a domestic money market fund. The mutual fund investment is not traded in an active market and its fair value is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. The cost of the money market fund held as of December 31, 2022, which was traded in an active market, approximated its fair value because of the short-term nature of the investment. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss on the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue on the consolidated statements of comprehensive income and were not significant for the quarters ended March 31, 2023 and 2022.


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

Information regarding the fair values of our financial instruments was as follows:


						Fair value measurements using
		March 31, 2023				Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
(in thousands)	Balance sheet location	Carrying value		Fair value
Measured at fair value through comprehensive income:
Available-for-sale debt securities	Funds held for customers	$	8,370	$	8,370	$	—	$	8,370	$	—
Derivative liabilities (Note 7)	Other non-current liabilities	(895)		(895)		—		(895)		—
Amortized cost:
Cash	Cash and cash equivalents	24,622		24,622		24,622		—

Form: 10-Q

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