August 4, 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 June 30, 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 July 26, 2023 was 43,616,556.


PART I – FINANCIAL INFORMATION


Item 1. FINANCIAL STATEMENTS


DELUXE CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited)


(in thousands, except share par value)	June 30, 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	$	39,052	$	40,435
Trade accounts receivable, net of allowance for credit losses	212,267		206,617
Inventories and supplies	54,899		52,267
Funds held for customers, including securities carried at fair value of $8,402 and $8,126, respectively	155,794		302,291
Prepaid expenses	32,820		36,642
Revenue in excess of billings	37,236		38,761
Other current assets	16,580		27,024
Total current assets	548,648		704,037
Deferred income taxes	1,341		1,956
Long-term investments	66,465		47,783
Property, plant and equipment, net of accumulated depreciation of $353,847 and $379,988, respectively	126,967		124,894
Operating lease assets	52,500		47,132
Intangibles, net of accumulated amortization of $831,755 and $823,589, respectively	430,103		458,979
Goodwill	1,430,588		1,431,385
Other non-current assets	266,403		260,354
Total assets	$	2,923,015	$	3,076,520
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	174,662	$	157,055
Funds held for customers	155,182		305,138
Accrued liabilities	155,195		218,404
Current portion of long-term debt	86,059		71,748
Total current liabilities	571,098		752,345
Long-term debt	1,581,151		1,572,528
Operating lease liabilities	54,470		48,925
Deferred income taxes	37,597		45,510
Other non-current liabilities	65,070		52,988
Commitments and contingencies (Note 13)
Shareholders' equity:
Common shares $1 par value (authorized: 500,000 shares; outstanding: June 30, 2023 – 43,613; December 31, 2022 – 43,204)	43,613		43,204
Additional paid-in capital	89,380		79,234
Retained earnings	511,058		518,635
Accumulated other comprehensive loss	(30,891)		(37,264)
Non-controlling interest	469		415
Total shareholders’ equity	613,629		604,224
Total liabilities and shareholders’ equity	$	2,923,015	$	3,076,520

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


	Quarter Ended June 30,				Six Months Ended June 30,
(in thousands, except per share amounts)	2023		2022		2023		2022
Product revenue	$	323,805	$	322,109	$	634,031	$	639,412
Service revenue	247,881		240,844		483,020		479,556
Total revenue	571,686		562,953		1,117,051		1,118,968
Cost of products	(125,453)		(117,519)		(243,888)		(231,879)
Cost of services	(144,494)		(146,593)		(276,721)		(281,427)
Total cost of revenue	(269,947)		(264,112)		(520,609)		(513,306)
Gross profit	301,739		298,841		596,442		605,662
Selling, general and administrative expense	(245,359)		(249,626)		(492,989)		(509,325)
Restructuring and integration expense	(24,191)		(15,182)		(37,132)		(31,426)
Gain on sale of businesses and facility	21,942		17,527		21,942		17,527
Operating income	54,131		51,560		88,263		82,438
Interest expense	(31,932)		(21,349)		(61,948)		(41,672)
Other income, net	824		2,414		3,247		4,417
Income before income taxes	23,023		32,625		29,562		45,183
Income tax provision	(6,622)		(10,528)		(10,381)		(13,407)
Net income	16,401		22,097		19,181		31,776
Net income attributable to non-controlling interest	(26)		(35)		(54)		(71)
Net income attributable to Deluxe	$	16,375	$	22,062	$	19,127	$	31,705
Total comprehensive income	$	25,517	$	26,168	$	25,554	$	38,314
Comprehensive income attributable to Deluxe	25,491		26,133		25,500		38,243
Basic earnings per share	0.38		0.51		0.44		0.74
Diluted earnings per share	0.37		0.50		0.44		0.72

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, March 31, 2023	43,421	$	43,421	$	83,800	$	507,992	$	(40,007)	$	443	$	595,649
Net income	—	—		—		16,375		—		26		16,401
Cash dividends ($0.30 per share)	—	—		—		(13,309)		—		—		(13,309)
Common shares issued	215	215		523		—		—		—		738
Common shares retired	(23)	(23)		(326)		—		—		—		(349)
Employee share-based compensation	—	—		5,383		—		—		—		5,383
Other comprehensive income	—	—		—		—		9,116		—		9,116
Balance, June 30, 2023	43,613	$	43,613	$	89,380	$	511,058	$	(30,891)	$	469	$	613,629


(in thousands)	Common shares	Common shares par value		Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Non-controlling interest		Total
Balance, March 31, 2022	42,923	$	42,923	$	62,676	$	502,125	$	(29,025)	$	316	$	579,015
Net income	—	—		—		22,062		—		35		22,097
Cash dividends ($0.30 per share)	—	—		—		(13,290)		—		—		(13,290)
Common shares issued	201	201		606		—		—		—		807
Common shares retired	(44)	(44)		(1,170)		—		—		—		(1,214)
Employee share-based compensation	—	—		5,305		—		—		—		5,305
Other comprehensive income	—	—		—		—		4,071		—		4,071
Balance, June 30, 2022	43,080	$	43,080	$	67,417	$	510,897	$	(24,954)	$	351	$	596,791

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued) (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	—	—		—		19,127		—		54		19,181
Cash dividends ($0.60 per share)	—	—		—		(26,704)		—		—		(26,704)
Common shares issued	539	539		1,140		—		—		—		1,679
Common shares retired	(130)	(130)		(2,253)		—		—		—		(2,383)
Employee share-based compensation	—	—		11,259		—		—		—		11,259
Other comprehensive income	—	—		—		—		6,373		—		6,373
Balance, June 30, 2023	43,613	$	43,613	$	89,380	$	511,058	$	(30,891)	$	469	$	613,629


(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	—	—		—		31,705		—		71		31,776
Cash dividends ($0.60 per share)	—	—		—		(26,571)		—		—		(26,571)
Common shares issued	580	580		1,757		—		—		—		2,337
Common shares retired	(179)	(179)		(5,195)		—		—		—		(5,374)
Employee share-based compensation	—	—		13,487		—		—		—		13,487
Other comprehensive income	—	—		—		—		6,538		—		6,538
Balance, June 30, 2022	43,080	$	43,080	$	67,417	$	510,897	$	(24,954)	$	351	$	596,791

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Six Months Ended June 30,
(in thousands)	2023		2022
Cash flows from operating activities:
Net income	$	19,181	$	31,776
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	11,052		12,146
Amortization of intangibles	75,076		74,498
Operating lease expense	10,522		9,756
Amortization of prepaid product discounts	17,173		17,171
Deferred income taxes	(9,489)		(14,482)
Employee share-based compensation expense	11,350		13,038
Gain on sale of businesses and facility	(21,942)		(17,527)
Other non-cash items, net	21,606		15,546
Changes in assets and liabilities:
Trade accounts receivable	(9,889)		8,976
Inventories and supplies	(4,609)		(5,713)
Other current assets	11,876		(8,229)
Payments for cloud computing arrangement implementation costs	(5,846)		(11,340)
Other non-current assets	(7,216)		(8,157)
Accounts payable	21,134		(4,345)
Prepaid product discount payments	(12,742)		(12,285)
Other accrued and non-current liabilities	(79,900)		(28,642)
Net cash provided by operating activities	47,337		72,187
Cash flows from investing activities:
Purchases of capital assets	(55,904)		(45,246)
Proceeds from sale of businesses and facilities	27,880		23,875
Other	(9,878)		895
Net cash used by investing activities	(37,902)		(20,476)
Cash flows from financing activities:
Proceeds from issuing long-term debt and swingline loans	437,500		314,000
Payments on long-term debt and swingline loans	(416,376)		(323,376)

Net change in customer funds obligations	(149,336)		(100,067)
Employee taxes paid for shares withheld	(2,383)		(5,374)
Cash dividends paid to shareholders	(26,852)		(26,591)
Other	(3,273)		(2,870)
Net cash used by financing activities	(160,720)		(144,278)
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents	3,063		(3,336)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents	(148,222)		(95,903)
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)	$	189,193	$	189,588

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 June 30, 2023, the consolidated statements of comprehensive income for the quarters and six months ended June 30, 2023 and 2022, the consolidated statements of shareholders’ equity for the quarters and six months ended June 30, 2023 and 2022 and the consolidated statements of cash flows for the six months ended June 30, 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 six months ended June 30, 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 as of June 30, 2023 or our results of operations for the six months ended June 30, 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)	June 30, 2023		December 31, 2022
Trade accounts receivable – gross	$	217,705	$	210,799
Allowance for credit losses	(5,438)		(4,182)
Trade accounts receivable – net(1)	$	212,267	$	206,617

(1) Includes unbilled receivables of $54,882 as of June 30, 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 six months ended June 30, 2023 and 2022 were as follows:


	Six Months Ended June 30,
(in thousands)	2023		2022
Balance, beginning of year	$	4,182	$	4,130
Bad debt expense	3,027		1,449
Write-offs and other	(1,771)		(1,326)
Balance, end of period	$	5,438	$	4,253

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


(in thousands)	June 30, 2023		December 31, 2022
Raw materials	$	12,028	$	11,563
Semi-finished goods	6,098		7,777
Finished goods	37,836		32,938
Supplies	7,062		6,389
Reserve for excess and obsolete items	(8,125)		(6,400)
Inventories and supplies, net of reserve	$	54,899	$	52,267

Changes in the reserve for excess and obsolete items were as follows for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
(in thousands)	2023		2022
Balance, beginning of year	$	6,400	$	5,132
Amounts charged to expense	2,151		1,516
Write-offs and other	(426)		(1,211)
Balance, end of period	$	8,125	$	5,437

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


	June 30, 2023
(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value


Funds held for customers:(1)
Canadian and provincial government securities	$	9,499	$	—	$	(1,097)	$	8,402
Available-for-sale debt securities	$	9,499	$	—	$	(1,097)	$	8,402

(1) Funds held for customers, as reported on the consolidated balance sheet as of June 30, 2023, also included cash of $147,392.


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 June 30, 2023 were as follows:


(in thousands)	Fair value
Due in one year or less	$	3,394
Due in two to five years	1,723
Due in six to ten years	3,285
Available-for-sale debt securities	$	8,402

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)	June 30, 2023		December 31, 2022
Conditional right to receive consideration	$	24,608	$	26,520
Unconditional right to receive consideration(1)	12,628		12,241
Revenue in excess of billings	$	37,236	$	38,761

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

Intangibles – Intangibles were comprised of the following:


	June 30, 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	$	526,697	$	(379,518)	$	147,179	$	529,306	$	(395,514)	$	133,792
Customer lists/relationships	487,127		(335,245)		151,882		497,882		(312,986)		184,896
Technology-based intangibles	97,633		(49,560)		48,073		99,613		(47,478)		52,135
Partner relationships	74,134		(10,790)		63,344		74,682		(9,094)		65,588
Trade names	39,367		(22,742)		16,625		44,185		(26,510)		17,675
Software to be sold	36,900		(33,900)		3,000		36,900		(32,007)		4,893
Intangibles	$	1,261,858	$	(831,755)	$	430,103	$	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 $36,859 for the quarter ended June 30, 2023, $38,339 for the quarter ended June 30, 2022, $75,076 for the six months ended June 30, 2023 and $74,498 for the six months ended June 30, 2022. Based on the intangibles in service as of June 30, 2023, estimated future amortization expense is as follows:


(in thousands)	Estimated amortization expense
Remainder of 2023	$	65,253
2024	95,983
2025	67,446
2026	42,837
2027	33,036

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 six months ended June 30, 2023:


(in thousands)	Amount		Weighted-average amortization period (in years)
Internal-use software	$	48,829	3

Partner relationships	478		1
Acquired intangibles	$	49,307	3

Goodwill – Changes in goodwill by reportable segment and in total were as follows for the six months ended June 30, 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)		—		31		—		(797)
Balance, June 30, 2023	$	895,853	$	40,816	$	59,107	$	434,812	$	1,430,588

Balance, June 30, 2023:
Goodwill, gross	$	895,853	$	432,984	$	252,806	$	434,812	$	2,016,455
Accumulated impairment charges	—		(392,168)		(193,699)		—		(585,867)
Goodwill, net of accumulated impairment charges	$	895,853	$	40,816	$	59,107	$	434,812	$	1,430,588


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)	June 30, 2023		December 31, 2022
Postretirement benefit plan asset	$	82,834	$	79,343
Cloud computing arrangement implementation costs	67,270		71,547
Prepaid product discounts	46,321		44,824
Deferred contract acquisition costs(1)	24,906		21,300
Loans and notes receivable from distributors, net of allowance for credit losses(2)	12,782		13,259
Other	32,290		30,081
Other non-current assets	$	266,403	$	260,354

(1) Amortization of deferred contract acquisition costs was $5,315 for the six months ended June 30, 2023 and $3,767 for the six months ended June 30, 2022.

(2) 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 $970 as of June 30, 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 six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
(in thousands)	2023		2022
Balance, beginning of year	$	1,024	$	2,830
Bad debt (benefit) expense	(73)		264
Other	—		(402)
Balance, end of period	$	951	$	2,692

Past due receivables and those on non-accrual status were not material as of June 30, 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 June 30, 2023. There were no write-offs or recoveries recorded during the six months ended June 30, 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	$	1,076	$	400	$	3,886	$	9,341	$	14,703
3-4 internal grade	—		—		—		—		—
Loans and notes receivable	$	1,076	$	400	$	3,886	$	9,341	$	14,703


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

Changes in prepaid product discounts during the six months ended June 30, 2023 and 2022 were as follows:


	Six Months Ended June 30,
(in thousands)	2023		2022
Balance, beginning of year	$	44,824	$	56,527
Additions(1)	18,584		9,413
Amortization	(17,173)		(17,171)
Other	86		(86)
Balance, end of period	$	46,321	$	48,683

(1) Prepaid product discounts are generally accrued upon contract execution. Payments for prepaid product discounts were $12,742 for the six months ended June 30, 2023 and $12,285 for the six months ended June 30, 2022.

Accrued liabilities – Accrued liabilities were comprised of the following:


(in thousands)	June 30, 2023		December 31, 2022
Employee bonuses, including sales incentives	$	30,573	$	57,398
Deferred revenue(1)	29,204		47,012
Operating lease liabilities	13,764		12,780
Customer rebates	12,104		12,153
Prepaid product discounts	10,022		4,179
Wages and payroll liabilities, including vacation	9,460		20,264
Other	50,068		64,618
Accrued liabilities	$	155,195	$	218,404

(1) Revenue recognized for amounts included in deferred revenue at the beginning of the period was $29,637 for the six months ended June 30, 2023 and $20,238 for the six months ended June 30, 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)	June 30, 2023		June 30, 2022
Cash and cash equivalents	$	39,052	$	43,262
Restricted cash and restricted cash equivalents included in funds held for customers	147,392		143,702
Non-current restricted cash included in other non-current assets	2,749		2,624
Total cash, cash equivalents, restricted cash and restricted cash equivalents	$	189,193	$	189,588


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 June 30,				Six Months Ended June 30,
(in thousands, except per share amounts)	2023		2022		2023		2022
Earnings per share – basic:
Net income	$	16,401	$	22,097	$	19,181	$	31,776
Net income attributable to non-controlling interest	(26)		(35)		(54)		(71)
Net income attributable to Deluxe	16,375		22,062		19,127		31,705
Income allocated to participating securities	(12)		(16)		(19)		(23)
Income attributable to Deluxe available to common shareholders	$	16,363	$	22,046	$	19,108	$	31,682
Weighted-average shares outstanding	43,524		43,016		43,421		42,907
Earnings per share – basic	$	0.38	$	0.51	$	0.44	$	0.74

Earnings per share – diluted:
Net income	$	16,401	$	22,097	$	19,181	$	31,776
Net income attributable to non-controlling interest	(26)		(35)		(54)		(71)
Net income attributable to Deluxe	16,375		22,062		19,127		31,705
Income allocated to participating securities	—		(16)		(10)		(23)
Re-measurement of share-based awards classified as liabilities	—		(307)		(19)		(345)
Income attributable to Deluxe available to common shareholders	$	16,375	$	21,739	$	19,098	$	31,337
Weighted-average shares outstanding	43,524		43,016		43,421		42,907
Dilutive impact of potential common shares	216		269		279		349
Weighted-average shares and potential common shares outstanding	43,740		43,285		43,700		43,256
Earnings per share – diluted	$	0.37	$	0.50	$	0.44	$	0.72
Antidilutive options excluded from calculation	1,553		1,891		1,553		1,891


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 June 30,				Six Months Ended June 30,
(in thousands)	2023		2022		2023		2022
Amortization of postretirement benefit plan items:
Prior service credit	$	355	$	355	$	711	$	711	Other income
Net actuarial loss	(568)		(225)		(1,137)		(450)		Other income
Total amortization	(213)		130		(426)		261		Other income
Tax benefit (expense)	16		(79)		32		(157)		Income tax provision
Amortization of postretirement benefit plan items, net of tax	(197)		51		(394)		104		Net income
Realized loss on debt securities	—		(8)		—		(8)		Revenue
Tax benefit	—		2		—		2		Income tax provision
Realized loss on debt securities, net of tax	—		(6)		—		(6)		Net income
Realized gain (loss) on cash flow hedges	634		(144)		1,204		(464)		Interest expense
Tax (expense) benefit	(169)		38		(321)		123		Income tax provision
Realized gain (loss) on cash flow hedges, net of tax	465		(106)		883		(341)		Net income
Currency translation adjustment(1)	(863)		(5,550)		(863)		(5,550)		Gain on sale of businesses and facility
Total reclassifications, net of tax	$	(595)	$	(5,611)	$	(374)	$	(5,793)

(1) Relates to the sale of our North American web hosting business during the quarter ended June 30, 2023 and the sale of our Australian web hosting business during the quarter ended June 30, 2022. Further information can be found in Note 6.

Accumulated other comprehensive loss – Changes in the components of accumulated other comprehensive loss during the six months ended June 30, 2023 were as follows:


(in thousands)	Postretirement benefit plans		Net unrealized loss on debt securities(1)		Net unrealized gain 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 (loss) income before reclassifications	—		(8)		4,858		1,149		5,999
Amounts reclassified from accumulated other comprehensive loss	394		—		(883)		863		374
Net current-period other comprehensive income (loss)	394		(8)		3,975		2,012		6,373
Balance, June 30, 2023	$	(26,478)	$	(917)	$	6,568	$	(10,064)	$	(30,891)

(1) Other comprehensive loss before reclassifications is net of an income tax benefit of $3.

(2) Other comprehensive income before reclassifications is net of income tax expense of $1,768.


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


NOTE 6: DIVESTITURES

2023 divestiture – In June 2023, we completed the sale of our North American web hosting and logo design businesses for net cash proceeds of $31,230. We received $27,880 of these proceeds during the quarter ended June 30, 2023, with the remainder to be paid by the end of 2023. These businesses generated annual revenue of approximately $66,000 during 2022, primarily in our Data Solutions segment. During the quarter ended June 30, 2023, we recognized a pretax gain of $21,942 on this sale. The assets and liabilities sold were not material to our consolidated balance sheet.

2022 divestitures – In May 2022, we completed the sale of our Australian web hosting business for net cash proceeds of $17,620. This business generated annual revenue in our Data Solutions segment of $23,766 during 2021. During the quarter ended June 30, 2022, we recognized a pretax gain of $15,166 on this sale. The assets and liabilities sold were not material to our consolidated balance sheet.

In April 2022, we sold the assets of our Promotional Solutions strategic sourcing business and in August 2022, we sold the assets of our Promotional Solutions retail packaging business. These businesses generated annual revenue of approximately $29,000 during 2021. Neither the gain on these sales nor the assets and liabilities sold were material to our consolidated financial statements.

We believe that these divestitures allow us to focus our resources on the key growth areas of payments and data, while allowing us to optimize our operations.

Facility sale – In May 2022, we sold our former facility located in Lancaster, California for net cash proceeds of $6,929, and we recognized a pretax gain on the sale of $2,361 during the quarter ended June 30, 2022. The sale was a result of our continued real estate rationalization process.


NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

As part of our interest rate risk management strategy, we have 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. In June 2023, we entered into a 3-year interest rate swap agreement with a variable notional amount that resets quarterly. Our derivative instruments were comprised of the following:


							June 30, 2023		December 31, 2022
(in thousands)	Notional amount		Interest rate		Maturity	Balance sheet location	Fair value asset / (liability)		Fair value asset / (liability)
June 2023 amortizing interest rate swap:
	$	298,729	4.249	%	June 2026	Other non-current assets	$	1,358	$	—
March 2023 interest rate swap:
	200,000		4.003	%	March 2026	Other non-current assets	2,850		—
September 2022 interest rate swap:
	300,000		3.990	%	September 2025	Other non-current assets	4,807		2,409
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 June 30, 2023 and December 31, 2022, and their impact on


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

consolidated net income and the consolidated statements of cash flows was not material. We also expect that the amount that will be reclassified to interest expense during the next 12 months will not be material.


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 material for the quarters or six months ended June 30, 2023 and 2022.

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


						Fair value measurements using
		June 30, 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	$	8,402	$	8,402	$	—	$	8,402	$	—
Derivative assets (Note 7)	Other non-current assets	9,015		9,015		—		9,015		—
Amortized cost:
Cash	Cash and cash equivalents	39,052		39,052		39,052		—		—
Cash	Funds held for customers	147,392		147,392		147,392		—		—
Cash	Other non-current assets	2,749		2,749		2,749		—		—
Loans and notes receivable from distributors	Other current assets and other non-current assets	13,752		12,754		—		—		12,754
Long-term debt	Current portion of long-term debt and long-term debt	1,667,210		1,575,872		—		1,575,872		—


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


						Fair value measurements using
		December 31, 2022				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	Cash and cash equivalents	$	5,000	$	5,000	$	5,000	$	—	$	—
Available-for-sale debt securities	Funds held for customers	8,126		8,126		—		8,126		—
Derivative assets (Note 7)	Other current assets and other non-current assets	3,593		3,593		—		3,593		—
Amortized cost:
Cash	Cash and cash equivalents	35,435		35,435		35,435		—		—
Cash	Funds held for customers	294,165		294,165		294,165		—		—
Cash	Other non-current assets	2,815		2,815		2,815		—		—
Loans and notes receivable from distributors	Other current assets and other non-current assets	14,220		13,315		—		—		13,315
Long-term debt	Current portion of long-term debt and long-term debt	1,644,276		1,574,417		—		1,574,417		—


NOTE 9: RESTRUCTURING AND INTEGRATION EXPENSE

Restructuring and integration expense consists of costs related to the consolidation and migration of certain applications and processes, including our financial management systems. It also includes costs related to the integration of acquired businesses into our systems and processes. These costs consist primarily of information technology consulting, project management services and internal labor, as well as other costs associated with our initiatives, such as training, travel, relocation and costs associated with facility closures. In addition, we recorded employee severance costs related to these initiatives, as well as our ongoing cost reduction initiatives across functional areas. We are currently pursuing several initiatives designed to support our growth strategy and to increase our efficiency. Restructuring and integration expense is not allocated to our reportable business segments.

Restructuring and integration expense is reflected on the consolidated statements of comprehensive income as follows:


	Quarter Ended June 30,				Six Months Ended June 30,
(in thousands)	2023		2022		2023		2022
Total cost of revenue	$	3,286	$	26	$	4,439	$	85
Operating expenses	24,191		15,182		37,132		31,426
Restructuring and integration expense	$	27,477	$	15,208	$	41,571	$	31,511


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

Restructuring and integration expense for each period was comprised of the following:


	Quarter Ended June 30,				Six Months Ended June 30,
(in thousands)	2023		2022		2023		2022
External consulting fees	$	12,930	$	9,141	$	20,621	$	17,000
Employee severance benefits	6,161		3,281		6,347		4,406
Internal labor	1,750		2,604		3,872		4,300
Other	6,636		182		10,731		5,805
Restructuring and integration expense	$	27,477	$	15,208	$	41,571	$	31,511

Our restructuring and integration accruals are included in accrued liabilities on the consolidated balance sheets and represent expected cash payments required to satisfy the remaining severance obligations to those employees already terminated and those expected to be terminated under our various initiatives. The majority of the employee reductions and the related severance payments are expected to be completed by the end of 2023.

Changes in our restructuring and integration accruals were as follows:


(in thousands)	Employee severance benefits
Balance, December 31, 2022	$	8,528
Charges	6,720
Reversals	(373)
Payments	(7,406)
Balance, June 30, 2023	$	7,469

The charges and reversals presented in the rollforward of our restructuring and integration accruals do not include items charged directly to expense as incurred, as those items are not reflected in accrued liabilities on the consolidated balance sheets.


NOTE 10: INCOME TAX PROVISION

The effective income tax rate for the six months ended June 30, 2023 was 35.1%, compared to the effective tax rate of 22.3% for the year ended December 31, 2022. The reconciliation of our effective tax rate for 2022 to the U.S. federal statutory tax rate can be found under the caption "Note 10: Income Tax Provision" in the Notes to Consolidated Financial Statements appearing in the 2022 Form 10-K.

The increase in our effective tax rate for the six months ended June 30, 2023 was primarily driven by the impact of business exit activities, which increased our effective tax rate by 5.3 points. In June 2023, we recognized a capital loss for tax purposes related to the sale of our North American web hosting and logo design businesses, and we recorded a full valuation allowance against the deferred tax asset, as we do not expect to realize the related tax benefit. During the year ended December 31, 2022, we recognized a capital loss for tax purposes related to the sale of our Australian we

Form: 10-Q

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