November 3, 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 September 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 October 25, 2023 was 43,692,545.


PART I – FINANCIAL INFORMATION


Item 1. FINANCIAL STATEMENTS


DELUXE CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited)


(in thousands, except share par value)	September 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	$	42,189	$	40,435
Trade accounts receivable, net of allowance for credit losses	203,971		206,617
Inventories and supplies	49,259		52,267
Funds held for customers, including securities carried at fair value of $8,068 and $8,126, respectively	151,961		302,291
Prepaid expenses	32,297		36,642
Revenue in excess of billings	36,693		38,761
Other current assets	20,906		27,024
Total current assets	537,276		704,037
Deferred income taxes	1,473		1,956
Long-term investments	62,076		47,783
Property, plant and equipment, net of accumulated depreciation of $336,158 and $379,988, respectively	121,066		124,894
Operating lease assets	58,839		47,132
Intangibles, net of accumulated amortization of $856,782 and $823,589, respectively	410,679		458,979
Goodwill	1,430,564		1,431,385
Other non-current assets	262,696		260,354
Total assets	$	2,884,669	$	3,076,520
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	163,080	$	157,055
Funds held for customers	151,900		305,138
Accrued liabilities	187,019		218,404
Current portion of long-term debt	86,106		71,748
Total current liabilities	588,105		752,345
Long-term debt	1,546,329		1,572,528
Operating lease liabilities	59,280		48,925
Deferred income taxes	27,894		45,510
Other non-current liabilities	63,675		52,988
Commitments and contingencies (Note 13)
Shareholders' equity:
Common shares $1 par value (authorized: 500,000 shares; outstanding: September 30, 2023 – 43,691; December 31, 2022 – 43,204)	43,691		43,204
Additional paid-in capital	94,173		79,234
Retained earnings	489,677		518,635
Accumulated other comprehensive loss	(28,650)		(37,264)
Non-controlling interest	495		415
Total shareholders’ equity	599,386		604,224
Total liabilities and shareholders’ equity	$	2,884,669	$	3,076,520

See Condensed Notes to Unaudited Consolidated Financial Statements


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


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2023		2022		2023		2022
Product revenue	$	304,840	$	317,250	$	938,872	$	956,662
Service revenue	233,004		237,788		716,024		717,344
Total revenue	537,844		555,038		1,654,896		1,674,006
Cost of products	(118,050)		(113,608)		(361,938)		(345,488)
Cost of services	(137,077)		(142,617)		(413,799)		(424,044)
Total cost of revenue	(255,127)		(256,225)		(775,737)		(769,532)
Gross profit	282,717		298,813		879,159		904,474
Selling, general and administrative expense	(233,891)		(243,816)		(726,880)		(753,140)
Restructuring and integration expense	(22,935)		(15,188)		(60,067)		(46,614)
(Loss) gain on sale of businesses and long-lived assets	(4,324)		1,804		17,618		19,331
Operating income	21,567		41,613		109,830		124,051
Interest expense	(32,034)		(23,799)		(93,982)		(65,471)
Other income, net	1,316		3,075		4,562		7,492
(Loss) income before income taxes	(9,151)		20,889		20,410		66,072
Income tax benefit (provision)	1,194		(6,129)		(9,186)		(19,536)
Net (loss) income	(7,957)		14,760		11,224		46,536
Net income attributable to non-controlling interest	(26)		(35)		(80)		(106)
Net (loss) income attributable to Deluxe	$	(7,983)	$	14,725	$	11,144	$	46,430
Total comprehensive (loss) income	$	(5,716)	$	12,066	$	19,838	$	50,380
Comprehensive (loss) income attributable to Deluxe	(5,742)		12,031		19,758		50,274
Basic (loss) earnings per share	(0.18)		0.34		0.26		1.08
Diluted (loss) earnings per share	(0.18)		0.34		0.25		1.06

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, June 30, 2023	43,613	$	43,613	$	89,380	$	511,058	$	(30,891)	$	469	$	613,629
Net loss	—	—		—		(7,983)		—		26		(7,957)
Cash dividends ($0.30 per share)	—	—		—		(13,398)		—		—		(13,398)
Common shares issued	88	88		575		—		—		—		663
Common shares retired	(10)	(10)		(190)		—		—		—		(200)
Employee share-based compensation	—	—		4,408		—		—		—		4,408
Other comprehensive income	—	—		—		—		2,241		—		2,241
Balance, September 30, 2023	43,691	$	43,691	$	94,173	$	489,677	$	(28,650)	$	495	$	599,386


(in thousands)	Common shares	Common shares par value		Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Non-controlling interest		Total
Balance, June 30, 2022	43,080	$	43,080	$	67,417	$	510,897	$	(24,954)	$	351	$	596,791
Net income	—	—		—		14,725		—		35		14,760
Cash dividends ($0.30 per share)	—	—		—		(13,280)		—		—		(13,280)
Common shares issued	66	66		713		—		—		—		779
Common shares retired	(10)	(10)		(213)		—		—		—		(223)
Employee share-based compensation	—	—		5,939		—		—		—		5,939
Other comprehensive loss	—	—		—		—		(2,694)		—		(2,694)
Balance, September 30, 2022	43,136	$	43,136	$	73,856	$	512,342	$	(27,648)	$	386	$	602,072

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	—	—		—		11,144		—		80		11,224
Cash dividends ($0.90 per share)	—	—		—		(40,102)		—		—		(40,102)
Common shares issued	626	626		1,716		—		—		—		2,342
Common shares retired	(139)	(139)		(2,444)		—		—		—		(2,583)
Employee share-based compensation	—	—		15,667		—		—		—		15,667
Other comprehensive income	—	—		—		—		8,614		—		8,614
Balance, September 30, 2023	43,691	$	43,691	$	94,173	$	489,677	$	(28,650)	$	495	$	599,386


(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	—	—		—		46,430		—		106		46,536
Cash dividends ($0.90 per share)	—	—		—		(39,851)		—		—		(39,851)
Common shares issued	646	646		2,470		—		—		—		3,116
Common shares retired	(189)	(189)		(5,408)		—		—		—		(5,597)
Employee share-based compensation	—	—		19,426		—		—		—		19,426
Other comprehensive income	—	—		—		—		3,844		—		3,844
Balance, September 30, 2022	43,136	$	43,136	$	73,856	$	512,342	$	(27,648)	$	386	$	602,072

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Nine Months Ended September 30,
(in thousands)	2023		2022
Cash flows from operating activities:
Net income	$	11,224	$	46,536
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	14,968		18,595
Amortization of intangibles	110,017		110,353
Operating lease expense	14,387		14,397
Amortization of prepaid product discounts	25,291		26,258
Deferred income taxes	(20,406)		(21,791)
Employee share-based compensation expense	15,889		18,766
Gain on sale of businesses and long-lived assets	(17,618)		(19,331)
Other non-cash items, net	36,593		22,940
Changes in assets and liabilities:
Trade accounts receivable	(3,846)		(878)
Inventories and supplies	(625)		(14,540)
Other current assets	10,306		(11,826)
Payments for cloud computing arrangement implementation costs	(6,944)		(16,608)
Other non-current assets	(10,566)		(11,808)
Accounts payable	10,429		(1,090)
Prepaid product discount payments	(21,798)		(23,920)
Other accrued and non-current liabilities	(52,395)		(12,635)
Net cash provided by operating activities	114,906		123,418
Cash flows from investing activities:
Purchases of capital assets	(80,809)		(73,454)
Proceeds from sale of businesses and long-lived assets	39,872		25,248
Other	(9,798)		(1,144)
Net cash used by investing activities	(50,735)		(49,350)
Cash flows from financing activities:
Proceeds from issuing long-term debt and swingline loans	531,000		511,000
Payments on long-term debt and swingline loans	(545,532)		(524,175)

Net change in customer funds obligations	(150,936)		(88,079)
Employee taxes paid for shares withheld	(2,583)		(5,597)
Cash dividends paid to shareholders	(40,140)		(39,613)
Other	(5,399)		(3,097)
Net cash used by financing activities	(213,590)		(149,561)
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents	993		(14,107)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents	(148,426)		(89,600)
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)	$	188,989	$	195,891

See Condensed Notes to Unaudited Consolidated Financial Statements


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


NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS

The consolidated balance sheet as of September 30, 2023, the consolidated statements of comprehensive (loss) income for the quarters and nine months ended September 30, 2023 and 2022, the consolidated statements of shareholders’ equity for the quarters and nine months ended September 30, 2023 and 2022 and the consolidated statements of cash flows for the nine months ended September 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 nine months ended September 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 September 30, 2023 or our results of operations for the nine months ended September 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)	September 30, 2023		December 31, 2022
Trade accounts receivable – gross	$	210,570	$	210,799
Allowance for credit losses	(6,599)		(4,182)
Trade accounts receivable – net(1)	$	203,971	$	206,617

(1) Includes unbilled receivables of $57,134 as of September 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 nine months ended September 30, 2023 and 2022 were as follows:


	Nine Months Ended September 30,
(in thousands)	2023		2022
Balance, beginning of year	$	4,182	$	4,130
Bad debt expense	5,191		2,410
Write-offs and other	(2,774)		(3,006)
Balance, end of period	$	6,599	$	3,534

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


(in thousands)	September 30, 2023		December 31, 2022
Finished and semi-finished goods	$	40,453	$	40,715
Raw materials and supplies	18,508		17,952
Reserve for excess and obsolete items	(9,702)		(6,400)
Inventories and supplies, net of reserve	$	49,259	$	52,267

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


	Nine Months Ended September 30,
(in thousands)	2023		2022
Balance, beginning of year	$	6,400	$	5,132
Amounts charged to expense	3,859		2,552
Write-offs and other	(557)		(2,161)
Balance, end of period	$	9,702	$	5,523

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


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


Funds held for customers:(1)
Canadian and provincial government securities	$	9,380	$	—	$	(1,312)	$	8,068
Available-for-sale debt securities	$	9,380	$	—	$	(1,312)	$	8,068

(1) Funds held for customers, as reported on the consolidated balance sheet as of September 30, 2023, also included cash of $143,893.


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 September 30, 2023 were as follows:


(in thousands)	Fair value
Due in one year or less	$	3,364
Due in two to five years	1,670
Due in six to ten years	3,034
Available-for-sale debt securities	$	8,068

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)	September 30, 2023		December 31, 2022
Conditional right to receive consideration	$	26,482	$	26,520
Unconditional right to receive consideration(1)	10,211		12,241
Revenue in excess of billings	$	36,693	$	38,761

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

Intangibles – Intangibles were comprised of the following:


	September 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	$	539,892	$	(395,304)	$	144,588	$	529,306	$	(395,514)	$	133,792
Customer lists/relationships	479,240		(339,481)		139,759		497,882		(312,986)		184,896
Technology-based intangibles	97,633		(51,591)		46,042		99,613		(47,478)		52,135
Partner relationships	74,429		(12,292)		62,137		74,682		(9,094)		65,588
Trade names	39,367		(23,267)		16,100		44,185		(26,510)		17,675
Software to be sold	36,900		(34,847)		2,053		36,900		(32,007)		4,893
Intangibles	$	1,267,461	$	(856,782)	$	410,679	$	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 $34,941 for the quarter ended September 30, 2023, $35,855 for the quarter ended September 30, 2022, $110,017 for the nine months ended September 30, 2023 and $110,353 for the nine months ended September 30, 2022. Based on the intangibles in service as of September 30, 2023, estimated future amortization expense is as follows:


(in thousands)	Estimated amortization expense
Remainder of 2023	$	40,786
2024	101,903
2025	73,407
2026	46,238
2027	34,394

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 nine months ended September 30, 2023:


(in thousands)	Amount		Weighted-average amortization period (in years)
Internal-use software	$	66,734	3

Partner relationships	773		1
Acquired intangibles	$	67,507	3

Goodwill – Changes in goodwill by reportable segment and in total were as follows for the nine months ended September 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)		—		7		—		(821)
Balance, September 30, 2023	$	895,853	$	40,816	$	59,083	$	434,812	$	1,430,564

Balance, September 30, 2023:
Goodwill, gross	$	895,853	$	432,984	$	252,782	$	434,812	$	2,016,431
Accumulated impairment charges	—		(392,168)		(193,699)		—		(585,867)
Goodwill, net of accumulated impairment charges	$	895,853	$	40,816	$	59,083	$	434,812	$	1,430,564


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)	September 30, 2023		December 31, 2022
Postretirement benefit plan asset	$	84,508	$	79,343
Cloud computing arrangement implementation costs	63,112		71,547
Prepaid product discounts	41,365		44,824
Deferred contract acquisition costs(1)	22,490		21,300
Loans and notes receivable from distributors, net of allowance for credit losses(2)	12,442		13,259
Other	38,779		30,081
Other non-current assets	$	262,696	$	260,354

(1) Amortization of deferred contract acquisition costs was $8,088 for the nine months ended September 30, 2023 and $5,872 for the nine months ended September 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 $979 as of September 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 nine months ended September 30, 2023 and 2022:


	Nine Months Ended September 30,
(in thousands)	2023		2022
Balance, beginning of year	$	1,024	$	2,830
Bad debt (benefit) expense	(46)		1,221
Other	—		(402)
Balance, end of period	$	978	$	3,649

Past due receivables and those on non-accrual status were not material as of September 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 September 30, 2023. There were no write-offs or recoveries recorded during the nine months ended September 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	$	1,040	$	385	$	3,761	$	9,213	$	14,399
3-4 internal grade	—		—		—		—		—
Loans and notes receivable	$	1,040	$	385	$	3,761	$	9,213	$	14,399


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

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


	Nine Months Ended September 30,
(in thousands)	2023		2022
Balance, beginning of year	$	44,824	$	56,527
Additions(1)	21,809		18,721
Amortization	(25,291)		(26,258)
Other	23		(399)
Balance, end of period	$	41,365	$	48,591

(1) Prepaid product discounts are generally accrued upon contract execution. Payments for prepaid product discounts were $21,798 for the nine months ended September 30, 2023 and $23,920 for the nine months ended September 30, 2022.

Accrued liabilities – Accrued liabilities were comprised of the following:


(in thousands)	September 30, 2023		December 31, 2022
Employee bonuses, including sales incentives	$	39,991	$	57,398
Deferred revenue(1)	25,905		47,012
Interest	15,557		7,314
Restructuring	14,606		8,528
Customer rebates	14,453		12,153
Operating lease liabilities	13,882		12,780
Wages and payroll liabilities, including vacation	7,953		20,264
Prepaid product discounts	4,191		4,179
Other	50,481		48,776
Accrued liabilities	$	187,019	$	218,404

(1) Revenue recognized for amounts included in deferred revenue at the beginning of the period was $37,972 for the nine months ended September 30, 2023 and $41,222 for the nine months ended September 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)	September 30, 2023		September 30, 2022
Cash and cash equivalents	$	42,189	$	45,535
Restricted cash and restricted cash equivalents included in funds held for customers	143,893		147,614
Non-current restricted cash included in other non-current assets	2,907		2,742
Total cash, cash equivalents, restricted cash and restricted cash equivalents	$	188,989	$	195,891


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


NOTE 4: (LOSS) EARNINGS PER SHARE

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


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2023		2022		2023		2022
(Loss) earnings per share – basic:
Net (loss) income	$	(7,957)	$	14,760	$	11,224	$	46,536
Net income attributable to non-controlling interest	(26)		(35)		(80)		(106)
Net (loss) income attributable to Deluxe	(7,983)		14,725		11,144		46,430
Income allocated to participating securities	(9)		(10)		(29)		(33)
(Loss) income attributable to Deluxe available to common shareholders	$	(7,992)	$	14,715	$	11,115	$	46,397
Weighted-average shares outstanding	43,663		43,116		43,498		42,974
(Loss) earnings per share – basic	$	(0.18)	$	0.34	$	0.26	$	1.08

(Loss) earnings per share – diluted:
Net (loss) income	$	(7,957)	$	14,760	$	11,224	$	46,536
Net income attributable to non-controlling interest	(26)		(35)		(80)		(106)
Net (loss) income attributable to Deluxe	(7,983)		14,725		11,144		46,430
Income allocated to participating securities	(9)		—		(29)		(22)
Re-measurement of share-based awards classified as liabilities	—		(162)		—		(507)
(Loss) income attributable to Deluxe available to common shareholders	$	(7,992)	$	14,563	$	11,115	$	45,901
Weighted-average shares outstanding	43,663		43,116		43,498		42,974
Dilutive impact of potential common shares	—		234		273		310
Weighted-average shares and potential common shares outstanding	43,663		43,350		43,771		43,284
(Loss) earnings per share – diluted	$	(0.18)	$	0.34	$	0.25	$	1.06
Antidilutive options excluded from calculation	1,450		1,815		1,450		1,815


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 (loss) income was as follows:


Accumulated other comprehensive loss components	Amounts reclassified from accumulated other comprehensive loss								Affected line item in consolidated statements of comprehensive (loss) income
	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Amortization of postretirement benefit plan items:
Prior service credit	$	355	$	355	$	1,066	$	1,066	Other income
Net actuarial loss	(568)		(225)		(1,705)		(674)		Other income
Total amortization	(213)		130		(639)		392		Other income
Tax benefit (expense)	17		(79)		49		(237)		Income tax benefit (provision)
Amortization of postretirement benefit plan items, net of tax	(196)		51		(590)		155		Net (loss) income
Realized loss on debt securities	—		—		—		(8)		Revenue
Tax benefit	—		—		—		2		Income tax benefit (provision)
Realized loss on debt securities, net of tax	—		—		—		(6)		Net (loss) income
Realized gain (loss) on cash flow hedges	984		53		2,191		(412)		Interest expense
Tax (expense) benefit	(264)		(15)		(588)		109		Income tax benefit (provision)
Realized gain (loss) on cash flow hedges, net of tax	720		38		1,603		(303)		Net (loss) income
Currency translation adjustment(1)	—		—		(863)		(5,550)		(Loss) gain on sale of businesses and long-lived assets
Total reclassifications, net of tax	$	524	$	89	$	150	$	(5,704)

(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 for the nine months ended September 30, 2023 and 2022 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	—		(183)		8,487		460		8,764
Amounts reclassified from accumulated other comprehensive loss	590		—		(1,603)		863		(150)
Net current-period other comprehensive income (loss)	590		(183)		6,884		1,323		8,614
Balance, September 30, 2023	$	(26,282)	$	(1,092)	$	9,477	$	(10,753)	$	(28,650)

(1) Other comprehensive loss before reclassifications is net of an income tax benefit of $63.

(2) Other comprehensive income before reclassifications is net of income tax expense of $3,114.


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


(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, 2021	$	(15,431)	$	(344)	$	(2,261)	$	(13,456)	$	(31,492)
Other comprehensive (loss) income before reclassifications	—		(566)		4,712		(6,006)		(1,860)
Amounts reclassified from accumulated other comprehensive loss	(155)		6		303		5,550		5,704
Net current-period other comprehensive (loss) income	(155)		(560)		5,015		(456)		3,844
Balance, September 30, 2022	$	(15,586)	$	(904)	$	2,754	$	(13,912)	$	(27,648)

(1) Other comprehensive loss before reclassifications is net of an income tax benefit of $197.

(2) Other comprehensive income before reclassifications is net of income tax expense of $1,701.


NOTE 6: DIVESTITURES

During the past 2 years, we have exited certain of our businesses. 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.

2023 divestiture / business exit – 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 September 30, 2023, we recorded an out-of-period correcting adjustment that decreased the gain recognized on this sale by $4,457. This adjustment was not material to the current or any historical interim or annual period. During the nine months ended September 30, 2023, we recognized a pretax gain of $17,486 on this sale. The assets and liabilities sold were not material to our consolidated balance sheet.

In September 2023, we decided to exit our U.S.-based payroll business, and we executed a customer conversion agreement with another service provider. During the quarter ended September 30, 2023, we received advance consideration of $10,000 under this agreement, which is included in proceeds from sale of businesses and long-lived assets on the consolidated statement of cash flows. A corresponding liability is reflected in accrued liabilities on the consolidated balance sheet as of September 30, 2023. The final amount of consideration under the agreement will be determined in mid-2024, and any income recognized will be based on actual customer conversion and retention activity. This business generated revenue of approximately $7,000 in our Payments segment during 2022.

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.

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


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

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:


							September 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:
	$	287,901	4.249	%	June 2026	Other non-current assets	$	3,201	$	—
March 2023 interest rate swap:
	200,000		4.003	%	March 2026	Other non-current assets	3,964		—
September 2022 interest rate swap:
	300,000		3.990	%	September 2025	Other non-current assets	5,837		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 September 30, 2023 and December 31, 2022, and their impact on consolidated net (loss) 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

2023 annual goodwill impairment analysis – Our impairment of goodwill policy can be found under the caption "Note 1: Significant Accounting Policies" in the Notes to Consolidated Financial Statements appearing in the 2022 Form 10-K. This policy explains our methodology for assessing the impairment of goodwill.

In completing the 2023 annual impairment analysis as of July 31, 2023, we elected to perform qualitative analyses for all of our reporting units. These qualitative analyses evaluated factors, including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the most recent quantitative analyses completed in prior periods. In completing these assessments, we noted no changes in events or circumstances that indicated that it was more likely than not that the fair value of any reporting unit was less than its carrying amount. As such, no goodwill impairment charges were recorded as a result of our 2023 annual impairment analysis.

Recurring 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 (loss) income and were not material for the quarters or nine months ended September 30, 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
		September 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 (loss) income:
Available-for-sale debt securities	Funds held for customers	$	8,068	$	8,068	$	—	$	8,068	$	—
Derivative assets (Note 7)	Other non-current assets	13,002		13,002		—		13,002		—
Amortized cost:
Cash	Cash and cash equivalents	42,189		42,189		42,189		—		—
Cash	Funds held for customers	143,893		143,893		143,893		—		—
Cash	Other non-current assets	2,907		2,907		2,907		—		—
Loans and notes receivable from distributors	Other current assets and other non-current assets	13,421		12,279		—		—		12,279
Long-term debt	Current portion of long-term debt and long-term debt	1,632,435		1,561,272		—		1,561,272		—


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 initiatives to drive earnings and cash flow growth and also includes costs related to the consolidation and migration of certain applications and processes, including our financial management systems. These costs consist primarily of consulting, project management services and internal labor, as well as other costs associated with our initiatives, such as costs associated with facility closures and consolidations. In addition, we have recorded employee severance costs across functional areas. Restructuring and integration expense is not allocated to our reportable business segments.

We are currently pursuing several initiatives designed to support our growth strategy and to increase our efficiency, and we recently announced our North Star initiative. The goal of this initiative is to further drive shareholder value by expanding our earnings before interest, taxes, depreciation and amortization (EBITDA) growth trajectory, increasing cash flow, paying down debt and improving our leverage ratio. North Star is a balanced mix of structural cost reductions focused on organizational structure, processes and operational improvements, in addition to workstreams to drive revenue growth. We have already combined like-for-like capabilities, reduced management layers and consolidated core operations to run more efficiently and create the ability to invest in high impact talent to accelerate our growth businesses of payments and data. The associated costs, which consisted primarily of consulting and severance costs, drove the increase in restructuring and integration costs during the quarter ended September 30, 2023.


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

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


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023	2022
Total cost of revenue	$	6,429	$	131

Form: 10-Q

Documents