UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended	~~September~~June 30, ~~2017~~2018
[ ]	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)



Minnesota (State or other jurisdiction of incorporation or organization)	41-0216800 (I.R.S. Employer Identification No.)
3680 Victoria St. N., Shoreview, Minnesota (Address of principal executive offices)	55126-2966 (Zip Code)

(651) 483-7111

(Registrant’s telephone number, including area code)

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. [X] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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).

[X] 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 [X]	Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	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 [X] No

The number of shares outstanding of registrant’s common stock, par value $1.00 per share, as of ~~October~~July 18, ~~2017~~2018 was ~~48,121,582.~~47,622,187.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

DELUXE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share par value)

(Unaudited)


	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	53,410		$	76,574		$	68,594		$	59,240
Trade accounts receivable (net of allowances for uncollectible accounts of $2,808 and $2,828, respectively)	136,262			152,649
Trade accounts receivable, net of allowances for uncollectible accounts							131,132			149,844
Inventories and supplies	40,929			40,182			43,233			42,249
Funds held for customers	78,447			87,823			92,606			86,192
Other current assets	63,471			41,002			73,839			55,441
Total current assets	372,519			398,230			409,404			392,966
Deferred income taxes	2,839			1,605			1,778			1,428
Long-term investments (including $1,729 and $1,877 of investments at fair value, respectively)	42,178			42,240
Property, plant and equipment (net of accumulated depreciation of $355,254 and $349,249, respectively)	83,253			86,896
Long-term investments							43,172			42,607
Property, plant and equipment (net of accumulated depreciation of $363,143 and $358,020, respectively)							81,751			84,638
Assets held for sale	8,689			14,568			3,822			12,232
Intangibles (net of accumulated amortization of $481,667 and $435,756, respectively)	392,523			409,781
Intangibles (net of accumulated amortization of $497,117 and $444,933, respectively)							386,143			384,266
Goodwill	1,126,086			1,105,956			1,173,475			1,130,934
Other non-current assets	151,893			125,062			193,699			159,756
Total assets	$	2,179,980		$	2,184,338		$	2,293,244		$	2,208,827

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	103,577		$	106,793		$	105,281		$	104,477
Accrued liabilities	255,542			273,049			245,719			277,253
Long-term debt due within one year	41,966			35,842			765			44,040
Total current liabilities	401,085			415,684			351,765			425,770
Long-term debt	714,432			722,806			766,039			665,260
Deferred income taxes	65,226			85,172			55,828			50,543
Other non-current liabilities	48,692			79,706			44,476			52,241
Commitments and contingencies (Notes 11 and 12)
Shareholders' equity:
Common shares $1 par value (authorized: 500,000 shares; outstanding: September 30, 2017 – 48,120; December 31, 2016 – 48,546)	48,120			48,546
Common shares $1 par value (authorized: 500,000 shares; outstanding: June 30, 2018 – 47,623; December 31, 2017 – 47,953)							47,623			47,953
Retained earnings	947,261			882,795			1,076,683			1,004,657
Accumulated other comprehensive loss	(44,836		)	(50,371		)	(49,170		)	(37,597		)
Total shareholders’ equity	950,545			880,970			1,075,136			1,015,013
Total liabilities and shareholders’ equity	$	2,179,980		$	2,184,338		$	2,293,244		$	2,208,827

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share amounts)

(Unaudited)


	Quarter Ended September 30,						Nine Months Ended September 30,						Quarter Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Product revenue	$	361,963		$	364,680		$	1,097,777		$	1,090,686		$	359,935		$	363,641		$	723,342		$	735,815
Service revenue	135,706			94,240			372,889			278,174			128,309			121,591			256,816			237,183
Total revenue	497,669			458,920			1,470,666			1,368,860			488,244			485,232			980,158			972,998
Cost of products	(129,055		)	(133,628		)	(392,040		)	(391,161		)	(134,332		)	(130,728		)	(267,703		)	(263,260		)
Cost of services	(63,862		)	(32,642		)	(159,250		)	(99,246		)	(55,869		)	(48,640		)	(111,256		)	(95,422		)
Total cost of revenue	(192,917		)	(166,270		)	(551,290		)	(490,407		)	(190,201		)	(179,368		)	(378,959		)	(358,682		)
Gross profit	304,752			292,650			919,376			878,453			298,043			305,864			601,199			614,316
Selling, general and administrative expense	(202,999		)	(198,365		)	(628,100		)	(598,563		)	(209,585		)	(208,656		)	(420,739		)	(425,800		)
Net restructuring charges	(1,267		)	(1,993		)	(3,708		)	(4,007		)	(5,635		)	(1,427		)	(7,780		)	(2,441		)
Asset impairment charges	(46,630		)	—			(54,880		)	—			—			(2,954		)	(2,149		)	(8,250		)
Operating income	53,856			92,292			232,688			275,883			82,823			92,827			170,531			177,825
Interest expense	(5,708		)	(4,855		)	(15,795		)	(15,281		)	(6,130		)	(5,258		)	(11,708		)	(10,087		)
Other income	799			742			2,104			1,335			2,436			1,250			3,724			2,312
Income before income taxes	48,947			88,179			218,997			261,937			79,129			88,819			162,547			170,050
Income tax provision	(20,146		)	(29,516		)	(73,551		)	(86,783		)	(18,922		)	(29,240		)	(39,003		)	(53,405		)
Net income	$	28,801		$	58,663		$	145,446		$	175,154		$	60,207		$	59,579		$	123,544		$	116,645
Comprehensive income	$	31,543		$	57,824		$	150,981		$	180,298		$	57,272		$	61,190		$	118,838		$	119,438
Basic earnings per share	0.60			1.20			3.00			3.57			1.26			1.23			2.58			2.40
Diluted earnings per share	0.59			1.19			2.98			3.55			1.25			1.22			2.56			2.38
Cash dividends per share	0.30			0.30			0.90			0.90			0.30			0.30			0.60			0.60

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(in thousands)

(Unaudited)


	Common shares		Common shares par value			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total			Common shares		Common shares par value			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total
Balance, December 31, 2016	48,546		$	48,546		$	—		$	882,795		$	(50,371	)	$	880,970
Balance, December 31, 2017																		47,953		$	47,953		$	—		$	1,004,657		$	(37,597	)	$	1,015,013
Net income	—		—			—			145,446			—			145,446			—		—			—			123,544			—			123,544
Cash dividends	—		—			—			(43,672		)	—			(43,672		)	—		—			—			(28,804		)	—			(28,804		)
Common shares issued	435		435			12,906			—			—			13,341			490		490			16,677			—			—			17,167
Common shares repurchased	(709	)	(709		)	(12,053		)	(37,308		)	—			(50,070		)	(573	)	(573		)	(4,876		)	(34,547		)	—			(39,996		)
Other common shares retired	(152	)	(152		)	(11,148		)	—			—			(11,300		)	(247	)	(247		)	(17,579		)	—			—			(17,826		)
Fair value of share-based compensation	—		—			10,295			—			—			10,295
Other comprehensive income	—		—			—			—			5,535			5,535
Balance, September 30, 2017	48,120		$	48,120		$	—		$	947,261		$	(44,836	)	$	950,545
Employee share-based compensation																		—		—			5,778			—			—			5,778
Adoption of Accounting Standards Update No. 2014-09 (Note 2)																		—		—			—			4,966			—			4,966
Adoption of Accounting Standards Update No. 2018-02 (Note 2)																		—		—			—			6,867			(6,867		)	—
Other comprehensive loss																		—		—			—			—			(4,706		)	(4,706		)
Balance, June 30, 2018																		47,623		$	47,623		$	—		$	1,076,683		$	(49,170	)	$	1,075,136

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


		Nine Months Ended September 30,							Six Months Ended June 30,
		2017			2016				2018			2017
Cash flows from operating activities:	Cash flows from operating activities:							Cash flows from operating activities:
Net income	Net income	$	145,446		$	175,154		Net income	$	123,544		$	116,645
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	Depreciation	12,013			11,347			Depreciation	7,823			8,223
Amortization of intangibles	Amortization of intangibles	79,284			56,364			Amortization of intangibles	55,694			51,828
Asset impairment charges	Asset impairment charges	54,880			—			Asset impairment charges	2,149			8,250
Amortization of contract acquisition costs		14,685			14,700
Amortization of prepaid product discounts								Amortization of prepaid product discounts	11,124			9,588
Deferred income taxes	Deferred income taxes	(20,587		)	(1,477		)	Deferred income taxes	(2,747		)	(6,942		)
Employee share-based compensation expense	Employee share-based compensation expense	11,149			9,264			Employee share-based compensation expense	5,757			7,309
Other non-cash items, net	Other non-cash items, net	(2,492		)	3,128			Other non-cash items, net	(7,543		)	(2,983		)
Changes in assets and liabilities, net of effect of acquisitions:	Changes in assets and liabilities, net of effect of acquisitions:							Changes in assets and liabilities, net of effect of acquisitions:
Trade accounts receivable	Trade accounts receivable	19,140			5,320			Trade accounts receivable	16,670			15,401
Inventories and supplies	Inventories and supplies	800			176			Inventories and supplies	(1,245		)	637
Other current assets	Other current assets	(16,692		)	(2,379		)	Other current assets	(12,435		)	(2,779		)
Non-current assets	Non-current assets	(3,748		)	(3,351		)	Non-current assets	(3,400		)	(1,776		)
Accounts payable	Accounts payable	(6,750		)	(1,619		)	Accounts payable	2,858			(12,063		)
Contract acquisition payments		(20,003		)	(17,190		)
Prepaid product discount payments								Prepaid product discount payments	(13,282		)	(10,937		)
Other accrued and non-current liabilities	Other accrued and non-current liabilities	(41,229		)	(41,316		)	Other accrued and non-current liabilities	(38,031		)	(28,823		)
Net cash provided by operating activities	Net cash provided by operating activities	225,896			208,121			Net cash provided by operating activities	146,936			151,578
Cash flows from investing activities:	Cash flows from investing activities:							Cash flows from investing activities:
Purchases of capital assets	Purchases of capital assets	(34,351		)	(32,215		)	Purchases of capital assets	(28,040		)	(22,788		)
Payments for acquisitions, net of cash acquired	Payments for acquisitions, net of cash acquired	(125,417		)	(64,637		)	Payments for acquisitions, net of cash acquired	(90,205		)	(77,553		)
Proceeds from sales of marketable securities	Proceeds from sales of marketable securities	3,500			1,635			Proceeds from sales of marketable securities	—			3,500
Proceeds from company-owned life insurance policies		1,293			4,123
Other	Other	873			695			Other	682			739
Net cash used by investing activities	Net cash used by investing activities	(154,102		)	(90,399		)	Net cash used by investing activities	(117,563		)	(96,102		)
Cash flows from financing activities:	Cash flows from financing activities:							Cash flows from financing activities:
Proceeds from issuing long-term debt	Proceeds from issuing long-term debt	333,000			169,000			Proceeds from issuing long-term debt	908,000			168,000
Payments on long-term debt	Payments on long-term debt	(336,590		)	(185,873		)	Payments on long-term debt	(851,410		)	(207,052		)
Proceeds from issuing shares under employee plans	Proceeds from issuing shares under employee plans	8,218			6,861			Proceeds from issuing shares under employee plans	5,767			5,914
Employee taxes paid for shares withheld	Employee taxes paid for shares withheld	(6,816		)	(2,333		)	Employee taxes paid for shares withheld	(7,947		)	(5,572		)
Payments for common shares repurchased	Payments for common shares repurchased	(50,070		)	(44,944		)	Payments for common shares repurchased	(39,996		)	(30,068		)
Cash dividends paid to shareholders	Cash dividends paid to shareholders	(43,672		)	(44,127		)	Cash dividends paid to shareholders	(28,762		)	(29,156		)
Other	Other	(1,281		)	(1,634		)	Other	(3,921		)	(511		)
Net cash used by financing activities	Net cash used by financing activities	(97,211		)	(103,050		)	Net cash used by financing activities	(18,269		)	(98,445		)
Effect of exchange rate change on cash	Effect of exchange rate change on cash	2,253			2,966			Effect of exchange rate change on cash	(1,750		)	1,175
Net change in cash and cash equivalents	Net change in cash and cash equivalents	(23,164		)	17,638			Net change in cash and cash equivalents	9,354			(41,794		)
Cash and cash equivalents, beginning of year	Cash and cash equivalents, beginning of year	76,574			62,427			Cash and cash equivalents, beginning of year	59,240			76,574
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	53,410		$	80,065		Cash and cash equivalents, end of period	$	68,594		$	34,780

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~~June 30, ~~2017~~2018, the consolidated statements of comprehensive income for the quarters and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017, the consolidated statement of shareholders’ equity for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018, and the consolidated statements of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 are unaudited. The consolidated balance sheet as of December 31, ~~2016~~2017 was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles (GAAP) in the United States of America. In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial statements are included. Adjustments consist only of normal recurring items, except for any discussed in the notes below. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented in accordance with instructions for Form 10-Q and do not contain certain information included in our annual consolidated financial statements and notes. The consolidated financial statements and notes appearing in this report should be read in conjunction with the consolidated audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 (the ~~“2016~~“2017 Form 10-K”).

Amounts within the cash flows from investing activities section of the consolidated statement of cash flows for the nine months ended September 30, 2016 have been modified to conform to the current year presentation. This change presents proceeds from sales of marketable securities separately. In the previous year, this item was included within the other caption.

Note 2: New accounting pronouncements

~~Recently~~The following discusses the impact of each accounting standards update (ASU) adopted ~~accounting pronouncements~~on January 1, 2018:

ASU No. 2014-09 – In ~~January 2017,~~May 2014, the Financial Accounting Standards Board (FASB) ~~issued Accounting Standards Update (ASU) No. 2017-04,~~ ~~Simplifying the Test for Goodwill Impairment~~. The standard removes Step 2 of the goodwill impairment test, which requires a company to perform procedures to determine the fair value of a reporting unit's assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, a goodwill impairment charge will now be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We elected to early adopt this standard on January 1, 2017 and applied this guidance when calculating the goodwill impairment charge discussed in Note 7: Fair value measurements.

~~Accounting pronouncements not yet adopted~~ ~~– In May 2014, the FASB~~ issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard provides revenue recognition guidance for any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other accounting standards. In addition, the FASB subsequently issued several amendments to the standard. We adopted the standard and all the related amendments on January 1, 2018 using the modified retrospective method. We applied the new guidance to uncompleted contracts as of January 1, 2018 and recorded the cumulative effect of initially applying the standard as an adjustment to retained earnings, with the offset to other current assets, other non-current assets and deferred income tax liabilities. We have elected the practical expedient for contract modifications, allowing us to consider the impact of all contract modifications completed prior to January 1, 2018. We have also elected the practical expedient that allows us to disregard the effects of a financing component if the period between payment and performance will be 1 year or less. Election of these practical expedients did not have a significant impact on our results of operations or financial position. Prior periods have not been restated and continue to be reported under the accounting standards in effect for those periods. We do not expect the adoption of this guidance to have a material impact on our results of operations, financial position or cash flows on an ongoing basis. The ~~standard~~new guidance also expands the required financial statement disclosures regarding revenue recognition. Those disclosures appear below, while information regarding the disaggregation of revenue can be found in Note 14.

Our product revenue is recognized when control of the goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods. In most cases, control is transferred when products are shipped. We recognize the vast majority of our service revenue as the services are provided. Many of our check supply contracts with financial institutions provide for rebates on certain products. We record these rebates as reductions of revenue and as accrued liabilities on our consolidated balance sheets when the related revenue is recognized. Many of our financial institution contracts also require prepaid product discounts in the form of upfront cash payments we make to our financial institution clients. These prepaid product discounts are included in other non-current assets in our consolidated balance sheets and are amortized as reductions of revenue, generally on the straight-line basis, over the contract term. Sales tax collected concurrent with revenue-producing activities is excluded from revenue. Amounts billed to customers for shipping and handling are included in revenue, while the related shipping and handling costs are reflected in cost of products. We have elected the practical expedient that allows us to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost, and we accrue costs of shipping and handling when the related revenue is recognized. As part of our Financial Services rewards, incentive and loyalty programs, we receive payments from consumers or our clients for the products and services provided, including hotel stays, gift cards and merchandise, such as apparel, electronics and clothing. This revenue is recorded net of the related fulfillment costs.

Certain of our contracts for data-driven marketing solutions and treasury management outsourcing services within Financial Services have variable consideration that is contingent on either the success of the marketing campaign ("pay-for-performance") or the volume of outsourcing services provided. We recognize revenue for estimated variable consideration as

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

services are provided based on the most likely amount to be realized. Revenue is recognized to the extent that it is probable that a significant reversal of revenue will not occur when the contingency is resolved. Estimates regarding the recognition of variable consideration are updated each quarter. Typically, the amount of consideration for these contracts is finalized within 3 months, although pricing under certain of our outsourcing contracts may be based on annual volume commitments. Revenue recognized from these contracts was approximately $100,000 in 2017. Under the new standard, we have accelerated the recognition of a portion of this variable consideration.

Certain of our contracts for treasury management solutions result from the sale of bundled arrangements that may include hardware, software and professional services, as well as customization and modification of software, and specify the timing of customer billings over the course of the contract. Revenue for these contracts is recognized using a cost-based input method that depicts the transfer of services to the customer. The transaction price is allocated to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost plus margin. When the revenue recognized for uncompleted contracts exceeds the amount of customer billings, a contract asset is reflected in our consolidated balance sheets within other current assets. The amount included in other current assets was $31,955 as of June 30, 2018 and $16,379 as of December 31, 2017. When the amount of customer billings for uncompleted contracts exceeds the revenue recognized, a contract liability is reflected in our consolidated balance sheets within accrued liabilities. The amount included in accrued liabilities was $1,509 as of June 30, 2018 and $2,233 as of December 31, 2017.

At times, a financial institution client may terminate its check supply contract with us prior to the end of the contract term. In many cases, the financial institution is contractually required to remit a contract termination payment. Such payments are recorded as revenue when the termination agreement is executed, provided that we have no further performance obligations and collection of the funds is assured. If we have further performance obligations following the execution of a contract termination agreement, we record the related revenue over the remaining service period.

Our payment terms vary by type of customer and the products or services offered. The time period between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer. When a customer pays in advance for services, primarily for treasury management solutions and web hosting services, we defer the revenue and recognize it as the services are performed, generally over a period of less than 1 year. Deferred revenue is included in accrued liabilities and other non-current liabilities in our consolidated balance sheets. The decrease of $4,308 in deferred revenue for the six months ended June 30, 2018 was primarily driven by the recognition of $32,221 of revenue that was included in deferred revenue as of December 31, 2017, partially offset by cash payments received in advance of satisfying our performance obligations. In addition to the amounts included in ~~March 2016, the FASB issued ASU No. 2016-08,~~ ~~Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~,deferred revenue, we will recognize revenue in ~~April 2016, the FASB issued ASU No. 2016-10,~~ ~~Identifying Performance Obligations~~future periods related to remaining performance obligations for certain of our data-driven marketing and ~~Licensing~~,treasury management solutions. Generally, these contracts have terms of 1 year or less and ~~in May 2016, the FASB issued ASU No. 2016-12,~~ ~~Narrow-Scope Improvements and Practical Expedients. These standards are intended~~many have terms of 3 months or less. The amount of revenue related to ~~clarify aspects of ASU No. 2014-09 and are effective for us upon adoption of ASU No. 2014-09.~~ these unsatisfied performance obligations is not significant to our annual consolidated revenue.

The new guidance ~~is effective for us on January 1, 2018. We are currently in the process of analyzing each of our revenue streams in accordance~~requires that certain costs incurred to obtain contracts be recognized as assets and amortized consistent with the ~~new guidance. We have completed~~transfer of goods or services to the ~~evaluation of our checks, forms~~customer. As such, we are now deferring sales commissions related to obtaining check supply and ~~accessories revenue streams~~treasury management solution contracts within Financial Services. These amounts are included in other non-current assets and ~~we do not expect the application~~are amortized as selling, general and administrative (SG&A) expense. Amortization of these ~~standards to those revenue streams to have a material impact~~amounts on ~~our results of operations or financial position. We continue to make progress in~~ the ~~evaluation of our various marketing solutions and other services revenue streams. We currently anticipate that we will adopt~~straight-line basis approximates the ~~standards using the modified retrospective method. This method requires the standard to be applied to existing and future contracts as~~timing of the ~~effective date, with an adjustment~~transfer of goods or services to ~~opening retained earnings~~the customer. Generally, these amounts are being amortized over periods of 3 to 6 years. We elected the practical expedient allowing us to expense sales commissions as incurred when the amortization period would have been 1 year or less.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in ~~the year of adoption for the~~thousands, except per share amounts)

The cumulative effect of the ~~change. In addition, we will disclose~~changes made to our unaudited consolidated balance sheet as of January 1, 2018 for the ~~amount by which each financial statement line item is affected in the current reporting period by the application~~adoption of the new revenue guidance was as ~~compared with~~follows:



(in thousands)	Balance as of December 31, 2017		Adjustments due to ASU No. 2014-09		Balance as of January 1, 2018
Other current assets	$	55,441	$	960	$	56,401
Total current assets	392,966		960		393,926
Other non-current assets	159,756		5,733		165,489
Total assets	$	2,208,827	$	6,693	$	2,215,520

Deferred income taxes	$	50,543	$	1,727	$	52,270
Retained earnings	1,004,657		4,966		1,009,623
Total liabilities and shareholders' equity	$	2,208,827	$	6,693	$	2,215,520

The impact of adoption of the new revenue guidance ~~that~~on our unaudited consolidated statements of comprehensive income for the quarter and six months ended June 30, 2018 and on our unaudited consolidated balance sheet as of June 30, 2018 was ~~in effect before the change.~~as follows:



(in thousands)	As reported			Effect of adoption			Balance without adoption of ASU No. 2014-09
	Quarter Ended June 30, 2018
Service revenue	$	128,309		$	(33	)	$	128,276
Total revenue	488,244			(33		)	488,211
Cost of services	(55,869		)	129			(55,740		)
Total cost of revenue	(190,201		)	129			(190,072		)
Gross profit	298,043			96			298,139
Selling, general and administrative expense	(209,585		)	(1,567		)	(211,152		)
Operating income	82,823			(1,471		)	81,352
Income before income taxes	79,129			(1,471		)	77,658
Income tax provision	(18,922		)	380			(18,542		)
Net income	$	60,207		$	(1,091	)	$	59,116

	Six Months Ended June 30, 2018
Service revenue	$	256,816		$	(568	)	$	256,248
Total revenue	980,158			(568		)	979,590
Cost of services	(111,256		)	384			(110,872		)
Total cost of revenue	(378,959		)	384			(378,575		)
Gross profit	601,199			(184		)	601,015
Selling, general and administrative expense	(420,739		)	(1,051		)	(421,790		)
Operating income	170,531			(1,235		)	169,296
Income before income taxes	162,547			(1,235		)	161,312
Income tax provision	(39,003		)	319			(38,684		)
Net income	$	123,544		$	(916	)	$	122,628

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)



(in thousands)	As reported		Effect of adoption			Balance without adoption of ASU No. 2014-09
	June 30, 2018
Other current assets	$	73,839	$	(1,146	)	$	72,693
Total current assets	409,404		(1,146		)	408,258
Other non-current assets	193,699		(6,783		)	186,916
Total assets	$	2,293,244	$	(7,929	)	$	2,285,315
Accrued liabilities	245,719		(319		)	245,400
Total current liabilities	351,765		(319		)	351,446
Deferred income taxes	55,828		(1,727		)	54,101
Retained earnings	1,076,683		(5,883		)	1,070,800
Total liabilities and shareholders' equity	$	2,293,244	$	(7,929	)	$	2,285,315

ASU No. 2016-01 – In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The standard is intended to improve the recognition, measurement, presentation and disclosure of financial instruments. ~~The guidance is effective for us~~We adopted this standard on January 1, 2018. ~~We do not expect the application of this~~This standard ~~to have a significant~~had no impact on our results of operations or financial position. Our financial statement disclosures in Note 7 related to financial instruments have been modified to comply with the new standard.

~~In February 2016, the FASB issued~~ ASU No. ~~2016-02,~~ 2016-16~~Leasing. The standard is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities for virtually all leases and by~~

~~DELUXE CORPORATION~~

~~CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share amounts)~~

requiring the disclosure of key information about leasing arrangements. The guidance is effective for us on January 1, 2019 and requires adoption using a modified retrospective approach. We are currently assessing the impact of this standard on our consolidated financial statements.

~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~Measurement of Credit Losses on Financial Instruments~~. The standard introduces new guidance for the accounting for credit losses on instruments within its scope, including trade and loans receivable and available-for-sale debt securities. The guidance is effective for us on January 1, 2020 and requires adoption using a modified retrospective approach. We do not expect the application of this standard to have a significant impact on our results of operations or financial position.

– In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The standard requires recognition of the tax effects resulting from the intercompany sale of an asset when the transfer occurs. Previously, the tax effects were deferred until the transferred asset was sold to a third party. ~~The guidance is effective for us~~We adopted this standard on January 1, ~~2018~~2018. No adjustment was required to opening retained earnings, and ~~requires adoption using a modified retrospective approach. We~~we do not expect the application of this standard to have a significant impact on our results of operations or financial ~~position.~~position going forward.

ASU No. 2017-01 –In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The standard revises the

definition of a business, which affects many areas of accounting such as business combinations and disposals and goodwill impairment. The revised definition of a business will likely result in more acquisitions being accounted for as asset acquisitions, as opposed to business combinations. ~~The guidance is effective for us~~We adopted this standard on January 1, 2018, ~~and is required to be applied prospectively~~applying the guidance to transactions occurring on or after ~~the effective~~this date.

ASU No. 2017-07 – In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that the service cost component of net periodic benefit expense be recognized in the same statement of comprehensive income caption(s) as other compensation costs, and requires that the other components of net periodic benefit expense be recognized in the non-operating section of the statement of comprehensive income. In addition, only the service cost component of net periodic benefit expense is eligible for capitalization when applicable. ~~The guidance is effective for us~~We adopted this standard on January 1, 2018. The reclassification of the other components of our net periodic benefit ~~expense will be~~income was applied on a retrospective basis. As such, we ~~will use~~have revised our results of operations for previous periods. We utilized the practical expedient for adoption ~~outlined~~allowing us to use the amount previously disclosed in our postretirement benefits footnote as the ~~standard, annual~~basis for revising prior periods. As there is no service cost associated with our plans, we reclassified the entire amount of our net periodic benefit income ~~of $2,016 for 2017, $1,841 for 2016 and $2,697 for 2015 will be reclassified~~ from ~~total~~ cost of revenue and ~~selling, general and administrative (SG&A)~~SG&A expense to other income in our consolidated statements of comprehensive income. ~~This represents the entire amount~~In addition, we no longer include any portion of ~~our~~ net periodic benefit income in amounts capitalized for inventory or internal-use software, as ~~there is no service cost associated with our plans. The guidance allowing~~ only the service cost component ~~of net periodic benefit expense to be capitalized will be adopted on a prospective basis, and we do~~is eligible for capitalization. This change did not ~~expect this change to~~ have a significant impact on our results of operations or financial position.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

The impact of the revision on our unaudited consolidated statements of comprehensive income for the quarter and six months ended June 30, 2017 was as follows:



(in thousands)	As previously reported			Effect of adoption			As revised
	Quarter Ended June 30, 2017
Cost of products	$	(130,591	)	$	(137	)	$	(130,728	)
Cost of services	(48,623		)	(17		)	(48,640		)
Total cost of revenue	(179,214		)	(154		)	(179,368		)
Selling, general and administrative expense	(208,306		)	(350		)	(208,656		)
Operating income	93,331			(504		)	92,827
Other income	746			504			1,250
Net income	$	59,579		$	—		$	59,579

	Six Months Ended June 30, 2017
Cost of products	$	(262,986	)	$	(274	)	$	(263,260	)
Cost of services	(95,388		)	(34		)	(95,422		)
Total cost of revenue	(358,374		)	(308		)	(358,682		)
Selling, general and administrative expense	(425,100		)	(700		)	(425,800		)
Operating income	178,833			(1,008		)	177,825
Other income	1,304			1,008			2,312
Net income	$	116,645		$	—		$	116,645

ASU No. 2017-09 – In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting. The standard provides guidance about which changes to the terms or conditions of a share-based payment award require modification accounting, which may result in a different fair value for the award. ~~The guidance is effective for us~~We adopted this standard on January 1, 2018, and it is ~~required to be~~being applied prospectively to awards modified on or after ~~the effective~~this date. Historically, modifications to our share-based payment awards have been ~~rare.~~infrequent. As such, we do not expect the application of this standard to have a significant impact on our results of operations or financial position.

ASU No. 2018-02 – In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard allows companies to make an election to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the "2017 Act"). We elected to early adopt this standard on January 1, 2018, applying it in the period of adoption. As such, a reclassification from accumulated other comprehensive loss to retained earnings of $6,867 was recorded during the quarter ended March 31, 2018. This represents the effect of the change in the United States federal corporate income tax rate on the gross deferred tax amount at the date of enactment of the 2017 Act related to items remaining in accumulated other comprehensive loss. Our policy is to release stranded income tax effects from accumulated other comprehensive loss when the circumstances upon which they are premised cease to exist.

In March 2018, the FASB issued ASU No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118. The standard added to the FASB Codification the guidance provided by the SEC in December 2017 regarding the accounting for the 2017 Act. We complied with SAB No. 118 when preparing our annual consolidated financial statements for the year ended December 31, 2017. Reasonable estimates were used in determining several of the components of the impact of the 2017 Act, including our 2017 deferred income tax activity and the amount of post-1986 foreign deferred earnings subject to the repatriation toll charge. We are still analyzing certain aspects of the 2017 Act and refining our calculations, which could potentially affect the measurement of our deferred tax balances and the amount of the repatriation toll charge liability, and ultimately cause us to revise our initial estimates in future periods. In addition, changes in interpretations, assumptions and guidance regarding the 2017 Act, as well as the potential for technical corrections, could have a material impact on our effective tax rate in future periods. During the quarter ended June 30, 2018, we recorded an increase in income tax expense of $441 as we refined our accounting for the 2017 Act, and during the six months ended June 30, 2018, we recorded an increase in income tax expense of $131.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

In order to complete our accounting for the 2017 Act, which we expect to finalize by the fourth quarter of 2018, the following specific items need to be completed or addressed:

issuance of state-by-state guidance regarding conformity with or decoupling from the 2017 Act;

finalize the calculation of post-1986 foreign deferred earnings, which are subject to the repatriation toll charge, and determine our ability to beneficially claim a foreign tax credit resulting from the income inclusion; and

where pertinent, adjust to clarifications and guidance regarding other aspects of the 2017 Act, including those related to the deductibility of executive compensation.

Accounting pronouncements not yet adopted – In February 2016, the FASB issued ASU No. 2016-02, Leasing. The standard is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities for virtually all leases and by requiring the disclosure of key information about leasing arrangements. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends narrow aspects of the guidance in ASU No. 2016-02. Both standards are effective for us on January 1, 2019 and require adoption using a modified retrospective approach. We have established an implementation team to evaluate and identify the impact of the standard on our financial position, results of operations and cash flows. We are currently assessing our leasing arrangements, evaluating the impact of practical expedients and accounting policy elections, and implementing software to meet the reporting requirements of the standard. We are not able to quantify the impact of the standard at this time.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The standard introduces new guidance for the accounting for credit losses on instruments within its scope, including trade and loans receivable and available-for-sale debt securities. The guidance is effective for us on January 1, 2020 and requires adoption using a modified retrospective approach. We do not expect the application of this standard to have a significant impact on our results of operations or financial position.

Note 3: Supplemental balance sheet information

Allowance for uncollectible accounts – Changes in the allowance for uncollectible accounts for the six months ended June 30, 2018 and 2017 was as follows:



	Six Months Ended June 30,
(in thousands)	2018			2017
Balance, beginning of year	$	2,884		$	2,828
Bad debt expense	1,470			1,635
Write-offs, net of recoveries	(1,383		)	(1,346		)
Balance, end of period	$	2,971		$	3,117

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


(in thousands)	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Raw materials	$	7,702	$	5,861	$	7,131	$	7,357
Semi-finished goods	8,322		7,990		7,787		7,635
Finished goods	21,716		23,235		25,348		24,146
Supplies	3,189		3,096		2,967		3,111
Inventories and supplies	$	40,929	$	40,182	$	43,233	$	42,249

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

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


	September 30, 2017									June 30, 2018
(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses			Fair value		Cost		Gross unrealized gains		Gross unrealized losses			Fair value
Funds held for customers:⁽¹⁾
Domestic money market fund	$	10,000	$	—	$	—		$	10,000	$	10,000	$	—	$	—		$	10,000
Canadian and provincial government securities	9,091		—		(424		)	8,667		8,747		—		(464		)	8,283
Canadian guaranteed investment certificates	8,018		—		—			8,018		7,614		—		—			7,614
Available-for-sale securities	$	27,109	$	—	$	(424	)	$	26,685
Available-for-sale debt securities										$	26,361	$	—	$	(464	)	$	25,897

⁽¹⁾Funds held for customers, as reported on the consolidated balance sheet as of ~~September~~June 30, ~~2017~~2018, also included cash of ~~$51,762.~~$66,709.


	December 31, 2016									December 31, 2017
(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses			Fair value		Cost		Gross unrealized gains		Gross unrealized losses			Fair value
Funds held for customers:⁽¹⁾
Domestic money market fund	$	6,002	$	—	$	—		$	6,002	$	17,300	$	—	$	—		$	17,300
Canadian and provincial government securities	8,320		—		(228		)	8,092		9,051		—		(393		)	8,658
Canadian guaranteed investment certificates	7,440		—		—			7,440		7,955		—		—			7,955
Available-for-sale securities	$	21,762	$	—	$	(228	)	$	21,534
Available-for-sale debt securities										$	34,306	$	—	$	(393	)	$	33,913

⁽¹⁾Funds held for customers, as reported on the consolidated balance sheet as of December 31, ~~2016~~2017, also included cash of $~~66,289~~52,279.

Expected maturities of available-for-sale debt securities as of ~~September~~June 30, ~~2017~~2018 were as follows:


(in thousands)	Fair value		Fair value
Due in one year or less	$	18,564	$	20,588
Due in two to five years	4,255		3,578
Due in six to ten years	3,866		1,731
Available-for-sale securities	$	26,685
Available-for-sale debt securities			$	25,897

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

Assets held for sale – Assets held for sale as of ~~September~~June 30, ~~2017~~2018 included ~~2 providers~~a provider of ~~printing~~printed and promotional products, ~~that were classified as held for sale during the third quarter of 2017.~~a small business distributor and a small business customer list. Assets held for sale as of December 31, ~~2016~~2017 included ~~the operations~~2 providers of ~~a small business distributor that~~printed and promotional products, 1 of which was sold during the second quarter of ~~2017~~2018, and ~~a provider~~2 small business distributors, 1 of ~~printed and promotional products that~~which was sold during the first quarter of ~~2017.~~2018. Also during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we sold ~~the operations of an additional~~certain small business ~~distributor~~customer lists that previously did not meet the requirements to be reported as assets held for sale in the consolidated balance ~~sheets, as well as a small business distributor and assets associated with certain custom printing activities that were classified as held for sale during the second quarter of 2017.~~sheets. We determined that ~~these businesses~~the assets sold would be better positioned for long-term growth if they were managed ~~independently.~~by independent distributors. Subsequent to the sales, ~~these~~the businesses and customer lists are owned by ~~independent~~ distributors that are part of our ~~Safeguard®~~Safeguard^® distributor network. As such, our revenue is not impacted by these sales, and the impact to our costs is not significant. We entered into aggregate notes receivable of ~~$24,497~~$22,715 in conjunction with these sales (non-cash investing activity), and we recognized aggregate net gains within SG&A expense of ~~$1,924 for~~$3,862 during the quarter ended ~~September~~June 30, ~~2017~~2018 and ~~$8,703 for~~$11,089 during the ~~nine~~six months ended ~~September~~June 30, ~~2017. The gains are included in~~2018. During the quarter ended March 31, 2017, we sold a provider of printed and promotional products and a small business distributor, realizing an aggregate net gain of $6,779 within SG&A expense in the consolidated ~~statements~~statement of comprehensive ~~income.~~income for the six months ended June 30, 2017.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

During the first quarter of 2017, we recorded a pre-tax asset impairment charge of $5,296 related to a small business distributor that was sold during the second quarter of 2017. This impairment charge reduced the carrying value of the business to its estimated fair value less costs to sell, as we negotiated the sale of the business. During the second quarter of 2017, we recorded an additional pre-tax asset impairment charge of $2,954 as we finalized the sale of this business, resulting in a total pre-tax asset impairment charge of $8,250 for the six months ended June 30, 2017.

The businesses sold during ~~2017,~~2018, as well as those held for sale as of ~~September~~June 30, ~~2017,~~2018, were included in our Small Business Services segment, and their net assets consisted primarily of intangible assets. During the first six months of 2017, we recorded aggregate pre-tax asset impairment charges of $8,250 related to the small business distributor sold during the second quarter of 2017. The impairment charges reduced the carrying value of the business to its fair value less costs to sell, as we finalized the sale of the business.

We are actively marketing the remaining assets held for sale, and we expect the selling prices will equal or exceed their current carrying values. Net assets held for sale consisted of the following:

(in thousands) September 30,
2017 December 31,
2016 Balance sheet caption
Current assets $ 4
$ 3
Other current assets
Intangibles 6,401
14,135
Assets held for sale
Goodwill 2,081
—
Assets held for sale
Other non-current assets 207
433
Assets held for sale
Accrued liabilities (621 ) (146 ) Accrued liabilities
Deferred income tax liabilities —
(5,697 ) Other non-current liabilities
Net assets held for sale $ 8,072
$ 8,728



(in thousands)	June 30, 2018		December 31, 2017		Balance sheet caption
Current assets	$	—	$	4	Other current assets
Intangibles	3,390		8,459		Assets held for sale
Goodwill	416		3,566		Assets held for sale
Other non-current assets	16		207		Assets held for sale
Net assets held for sale	$	3,822	$	12,236

Intangibles – Intangibles were comprised of the following:


	September 30, 2017							December 31, 2016							June 30, 2018							December 31, 2017
(in thousands)	Gross carrying amount		Accumulated amortization			Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount
Indefinite-lived intangibles:
Trade name	$	19,100	$	—		$	19,100	$	19,100	$	—		$	19,100	$	19,100	$	—		$	19,100	$	19,100	$	—		$	19,100
Amortizable intangibles:
Internal-use software	407,844		(335,112		)	72,732		385,293		(310,195		)	75,098		380,969		(303,099		)	77,870		359,079		(284,074		)	75,005
Customer lists/relationships(1)	337,985		(109,495		)	228,490		308,375		(76,276		)	232,099		355,384		(146,115		)	209,269		343,589		(121,729		)	221,860
Trade names⁽¹⁾	38,761		(20,595		)	18,166		68,261		(40,857		)	27,404		50,107		(22,833		)	27,274		36,931		(19,936		)	16,995
Technology-based intangibles															39,000		(10,053		)	28,947		31,800		(6,400		)	25,400
Software to be sold	36,900		(10,147		)	26,753		34,700		(7,050		)	27,650		36,900		(13,317		)	23,583		36,900		(11,204		)	25,696
Technology-based intangibles	31,800		(4,783		)	27,017		28,000		—			28,000
Other	1,800		(1,535		)	265		1,808		(1,378		)	430		1,800		(1,700		)	100		1,800		(1,590		)	210
Amortizable intangibles	855,090		(481,667		)	373,423		826,437		(435,756		)	390,681		864,160		(497,117		)	367,043		810,099		(444,933		)	365,166
Intangibles	$	874,190	$	(481,667	)	$	392,523	$	845,537	$	(435,756	)	$	409,781	$	883,260	$	(497,117	)	$	386,143	$	829,199	$	(444,933	)	$	384,266

⁽¹⁾ During the ~~third~~first quarter of ~~2017,~~2018, we recorded a pre-tax asset impairment charge of ~~$14,752~~$2,149 for one of our ~~trade names.~~customer lists. Further information can be found in Note 7.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

Amortization of intangibles was $~~27,456~~28,228 for the quarter ended ~~September~~June 30, ~~2017~~2018, $~~19,273~~26,273 for the quarter ended ~~September~~June 30, ~~2016~~2017, ~~$79,284~~$55,694 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~$56,364~~$51,828 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. Based on the intangibles in service as of ~~September~~June 30, ~~2017~~2018, estimated future amortization expense is as follows:


(in thousands)	Estimated amortization expense		Estimated amortization expense
Remainder of 2017	$	28,333
2018	93,153
Remainder of 2018			$	47,873
2019	72,877		84,662
2020	54,692		65,171
2021	44,412		50,832
2022			36,379

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we acquired internal-use software in the normal course of business. We also acquired intangible assets in conjunction with acquisitions (Note 6). The following intangible assets were acquired during the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2018:


(in thousands)	Amount		Weighted-average amortization period (in years)	Amount		Weighted-average amortization period (in years)
Customer lists/relationships⁽¹⁾				$	21,887	4
Internal-use software	$	27,065	3	21,573		3
Customer lists/relationships	50,184		8
Trade names	9,795		6	13,700		7
Software to be sold	2,200		5
Technology-based intangibles	800		3	7,200		5
Acquired intangibles	$	90,044	6	$	64,360	4

⁽¹⁾Includes the purchase of a customer list for $650 that did not qualify as a business combination.

Information regarding acquired intangibles does not include measurement-period adjustments recorded during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 for changes in the estimated fair values of intangibles acquired during ~~2016~~2017 through acquisitions. Information regarding these adjustments can be found in Note 6.

Goodwill – Changes in goodwill during the six months ended June 30, 2018 were as follows:



(in thousands)	Small Business Services			Financial Services		Direct Checks		Total
Balance, December 31, 2017:
Goodwill, gross	$	706,568		$	324,239	$	148,506	$	1,179,313
Accumulated impairment charges	(48,379		)	—		—		(48,379		)
Goodwill, net of accumulated impairment charges	658,189			324,239		148,506		1,130,934
Goodwill resulting from acquisitions	40,209			—		—		40,209
Measurement-period adjustments for prior year acquisitions (Note 6)	853			2,763		—		3,616
Adjustment of assets held for sale	218			—		—		218
Currency translation adjustment	(1,502		)	—		—		(1,502		)
Balance, June 30, 2018:
Goodwill, gross	746,346			327,002		148,506		1,221,854
Accumulated impairment charges	(48,379		)	—		—		(48,379		)
Goodwill, net of accumulated impairment charges	$	697,967		$	327,002	$	148,506	$	1,173,475

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

~~Goodwill~~ ~~– Changes in goodwill during the nine months ended~~ ~~September 30, 2017~~ ~~were as follows:~~

(in thousands)
Small
Business
Services

Financial
Services

Direct
Checks
Total
Balance, December 31, 2016:
Goodwill, gross $ 684,261
$ 293,189
$ 148,506
$ 1,125,956
Accumulated impairment charges (20,000 ) —
—
(20,000 )
Goodwill, net of accumulated impairment charges 664,261
293,189

148,506

1,105,956
Impairment charge (Note 7) (28,379 ) —
—
(28,379 )
Goodwill resulting from acquisitions 22,966
30,583
—
53,549
Measurement-period adjustments for previous acquisitions (Note 6) 30
(2,160 ) —
(2,130 )
Sale of small business distributor (1,000 ) —
—
(1,000 )
Reclassification to assets held for sale (2,484 ) —
—
(2,484 )
Currency translation adjustment 574
—
—
574
Balance, September 30, 2017:

Goodwill, gross 704,347
321,612
148,506
1,174,465
Accumulated impairment charges (48,379 ) —
—
(48,379 )
Goodwill, net of accumulated impairment charges $ 655,968
$ 321,612

$ 148,506

$ 1,126,086

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


(in thousands)	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Contract acquisition costs	$	66,631	$	65,792
Loans and notes receivable from Safeguard distributors	43,904		21,313		$	67,430	$	44,276
Prepaid product discounts⁽¹⁾					63,017		63,895
Postretirement benefit plan asset	28,840		23,940		43,535		39,849
Deferred advertising costs	5,987		7,309		5,240		6,135
Deferred sales commissions⁽²⁾					6,783		—
Other	6,531		6,708		7,694		5,601
Other non-current assets	$	151,893	$	125,062	$	193,699	$	159,756

⁽¹⁾ In our prior year financial statements, we referred to this asset as contract acquisition costs.

⁽²⁾Amortization of deferred sales commissions was $1,350 for the six months ended June 30, 2018.

Changes in ~~contract acquisition costs~~prepaid product discounts during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 were as follows:


	Nine Months Ended September 30,						Quarter Ended June 30,
(in thousands)	2017			2016			2018			2017
Balance, beginning of year	$	65,792		$	58,792		$	63,895		$	65,792
Additions⁽¹⁾	15,651			23,471			10,296			8,310
Amortization	(14,685		)	(14,700		)	(11,124		)	(9,588		)
Other	(127		)	(75		)	(50		)	(101		)
Balance, end of period	$	66,631		$	67,488		$	63,017		$	64,413

⁽¹⁾~~Contract acquisition costs~~Prepaid product discounts are generally accrued upon contract execution. Cash payments made for ~~contract acquisition costs~~prepaid product discounts were ~~$20,003~~$13,282 for the ~~nine~~six months ended ~~September~~June 30, 2018 and $10,937 for the six months ended June 30, 2017 ~~and $17,190 for the nine months ended~~ ~~September 30, 2016~~.

~~DELUXE CORPORATION~~

~~CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share amounts)~~

Accrued liabilities – Accrued liabilities were comprised of the following:


(in thousands)	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Funds held for customers	$	77,397	$	86,799	$	91,556	$	85,091
Deferred revenue	34,567		48,049		43,939		47,021
Employee profit sharing/cash bonus	25,560		27,760		20,462		31,312
Acquisition-related liabilities⁽¹⁾	25,346		12,763
Prepaid product discounts due within one year⁽¹⁾					12,915		11,670
Acquisition-related liabilities⁽²⁾					11,080		23,878
Customer rebates	14,256		16,281		10,895		11,508
Contract acquisition costs due within one year	13,508		12,426
Wages, including vacation	12,381		8,640
Restructuring due within one year (Note 8)					4,686		4,380
Income tax	6,890		19,708		1,555		17,827
Restructuring due within one year (Note 8)	1,549		4,181
Other	44,088		36,442		48,631		44,566
Accrued liabilities	$	255,542	$	273,049	$	245,719	$	277,253

⁽¹⁾~~Consists of holdback payments~~In our prior year financial statements, we referred to this liability as contract acquisition costs due ~~at future dates and liabilities for contingent consideration. Further information regarding liabilities for contingent consideration can be found in Note 7.~~within one year.

~~Other non-current liabilities~~ ~~– Other non-current liabilities were comprised of the following:~~

(in thousands) September 30,
2017 December 31,
2016
Contract acquisition costs $ 24,348
$ 29,855
Acquisition-related liabilities⁽¹⁾
2,415
19,390
Other 21,929
30,461
Other non-current liabilities $ 48,692
$ 79,706

⁽¹⁾⁽²⁾Consists of holdback payments due at future dates and liabilities for contingent consideration. Further information regarding liabilities for contingent consideration can be found in Note 7.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

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



(in thousands)	June 30, 2018		December 31, 2017
Prepaid product discounts⁽¹⁾	$	17,379	$	21,658
Other	27,097		30,583
Other non-current liabilities	$	44,476	$	52,241

⁽¹⁾In our prior year financial statements, we referred to this liability as contract acquisition costs.

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 September 30,						Nine Months Ended September 30,						Quarter Ended June 30,						Six Months Ended June 30,
(in thousands, except per share amounts)	2017			2016			2017			2016			2018			2017			2018			2017
Earnings per share – basic:
Net income	$	28,801		$	58,663		$	145,446		$	175,154		$	60,207		$	59,579		$	123,544		$	116,645
Income allocated to participating securities	(176		)	(491		)	(961		)	(1,445		)	(228		)	(379		)	(515		)	(785		)
Income available to common shareholders	$	28,625		$	58,172		$	144,485		$	173,709		$	59,979		$	59,200		$	123,029		$	115,860
Weighted-average shares outstanding	48,081			48,493			48,217			48,634			47,594			48,255			47,675			48,287
Earnings per share – basic	$	0.60		$	1.20		$	3.00		$	3.57		$	1.26		$	1.23		$	2.58		$	2.40

Earnings per share – diluted:
Net income	$	28,801		$	58,663		$	145,446		$	175,154		$	60,207		$	59,579		$	123,544		$	116,645
Income allocated to participating securities	(175		)	(487		)	(956		)	(1,436		)	(228		)	(378		)	(514		)	(781		)
Re-measurement of share-based awards classified as liabilities	53			(64		)	7			230			(90		)	(41		)	(176		)	(46		)
Income available to common shareholders	$	28,679		$	58,112		$	144,497		$	173,948		$	59,889		$	59,160		$	122,854		$	115,818
Weighted-average shares outstanding	48,081			48,493			48,217			48,634			47,594			48,255			47,675			48,287
Dilutive impact of potential common shares	296			455			331			427			183			325			222			349
Weighted-average shares and potential common shares outstanding	48,377			48,948			48,548			49,061			47,777			48,580			47,897			48,636
Earnings per share – diluted	$	0.59		$	1.19		$	2.98		$	3.55		$	1.25		$	1.22		$	2.56		$	2.38
Antidilutive options excluded from calculation	266			223			266			223			529			451			529			451

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)	2018			2017			2018			2017
Amortization of postretirement benefit plan items:
Prior service credit	$	355		$	355		$	711		$	711		Other income
Net actuarial loss	(721		)	(909		)	(1,442		)	(1,819		)	Other income
Total amortization	(366		)	(554		)	(731		)	(1,108		)	Other income
Tax benefit	45			165			400			330			Income tax provision
Total reclassifications, net of tax	$	(321	)	$	(389	)	$	(331	)	$	(778	)	Net income

Accumulated other comprehensive loss components Amounts reclassified from accumulated other comprehensive loss Affected line item in consolidated statements of comprehensive income
Quarter Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2017 2016 2017 2016
Amortization of postretirement benefit plan items:
Prior service credit $ 355
$ 355
1,066
1,066

⁽¹⁾
Net actuarial loss (909 ) (949 ) (2,728 ) (2,848 )
⁽¹⁾
Total amortization (554 ) (594 ) (1,662 ) (1,782 )
⁽¹⁾
Tax benefit 167
181
497
544

⁽¹⁾
Total reclassifications, net of tax $ (387 ) $ (413 ) $ (1,165 ) $ (1,238 )

⁽¹⁾Amortization of postretirement benefit plan items is included in the computation of net periodic benefit income as presented in Note 10. Net periodic benefit income is included in cost of revenue and SG&A expense in the consolidated statements of comprehensive income, based on the composition

~~DELUXE CORPORATION~~

~~CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share amounts)~~

~~of our workforce. A portion of net periodic benefit income is capitalized as a component of labor costs and is included in inventories and intangibles in our consolidated balance sheets.~~

Accumulated other comprehensive loss – Changes in the components of accumulated other comprehensive loss during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 were as follows:


(in thousands)	Postretirement benefit plans, net of tax			Net unrealized loss on marketable securities, net of tax⁽¹⁾			Currency translation adjustment			Accumulated other comprehensive loss			Postretirement benefit plans			Net unrealized loss on marketable debt securities, net of tax⁽¹⁾			Currency translation adjustment			Accumulated other comprehensive loss
Balance, December 31, 2016	$	(35,684	)	$	(213	)	$	(14,474	)	$	(50,371	)
Other comprehensive (loss) income before reclassifications	—			(130		)	4,500			4,370
Balance, December 31, 2017													$	(26,829	)	$	(322	)	$	(10,446	)	$	(37,597	)
Other comprehensive loss before reclassifications													—			(69		)	(4,968		)	(5,037		)
Amounts reclassified from accumulated other comprehensive loss	1,165			—			—			1,165			331			—			—			331
Net current-period other comprehensive income (loss)	1,165			(130		)	4,500			5,535			331			(69		)	(4,968		)	(4,706		)
Balance, September 30, 2017	$	(34,519	)	$	(343	)	$	(9,974	)	$	(44,836	)
Adoption of ASU No. 2018-02													(6,867		)	—			—			(6,867		)
Balance, June 30, 2018													$	(33,365	)	$	(391	)	$	(15,414	)	$	(49,170	)

⁽¹⁾Other comprehensive loss before reclassifications is net of income tax benefit of ~~$45.~~$24.

Note 6: Acquisitions

We ~~periodically~~regularly complete business combinations that align with our business strategy. The assets and liabilities acquired are recorded at their estimated fair values, and the results of operations of each acquired business are included in our consolidated statements of comprehensive income from their acquisition dates. Transaction costs related to acquisitions are expensed as incurred and are included in SG&A expense in the consolidated statements of comprehensive income. Transaction costs were not significant to our consolidated statements of comprehensive income for the ~~quarters or nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017. The acquisitions completed during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 were cash transactions, funded by ~~cash on hand and/or~~ use of our revolving credit facility. We completed these acquisitions primarily to increase our mix of marketing solutions and other services revenue, to add logo and web services capabilities, and to reach new customers.

~~2017~~2018 acquisitions – In ~~February 2017,~~June 2018, we acquired selected assets of ~~Panthur Pty Ltd (Panthur)~~Velocity Servers, Inc., ~~an Australian web~~doing business as ColoCrossing, a data center solutions, cloud hosting and domain registration service provider. The allocation of the purchase price based upon the estimated fair values of the assets acquired and liabilities assumed resulted in goodwill of $1,198 that is not deductible for tax purposes. The acquisition resulted in goodwill as we expect to utilize Panthur's platform as we selectively expand into foreign markets. The operations of this business from its acquisition date are included within our Small Business Services segment.

~~In April 2017, we acquired all of the equity of RDM Corporation (RDM) of Canada, a~~infrastructure colocation provider of ~~remote deposit capture software, hardware and digital imaging solutions for financial institutions and corporate clients.~~dedicated hosting services. The preliminary allocation of the purchase price based upon the estimated fair values of the assets acquired and liabilities assumed resulted in tax-deductible goodwill of ~~$30,583 that is not deductible for tax purposes.~~$10,300. The acquisition resulted in goodwill as ~~it enhances our suite of treasury management solutions, strengthening our value proposition and improving our market position. We~~we expect to finalize the allocation of the purchase price by the end of 2017 when our valuation of several of the acquired assets and liabilities is completed. The operations of this business from its acquisition date are included within our Financial Services segment.

In July 2017, we acquired all of the equity of Digital Pacific Group Pty Ltd (Digital Pacific), and in September 2017, we acquired all of the equity of j2 Global Australia Pty Ltd, doing business as Web24. Both businesses are based in Australia and provide web hosting and domain registration services. The preliminary allocations of the purchase price based upon the estimated fair values of the assets acquired and liabilities assumed resulted in goodwill of $21,768 that is not deductible for tax purposes. The goodwill resulted from our acquisition of enhanced web hosting capabilities as we selectively expand into foreign markets. We expect to finalize the allocations of the purchase price by the end of 2017 when our valuation of several of the acquired assets and liabilities is completed. The operations of these businesses from their acquisition dates are included within our Small Business Services segment.

accelerate revenue growth

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

by bringing colocation services into our portfolio of hosting products and services. The operations of this business from its acquisition date are included in our Small Business Services segment. We expect to finalize the allocation of the purchase price in the first half of 2019 when our valuation of the acquired intangible assets is completed, as well as the valuation of various other assets acquired and liabilities assumed.

In March 2018, we acquired all of the equity of Logomix Inc. (Logomix), a self-service marketing and branding platform that helps small businesses create logos and custom marketing products. The preliminary allocation of the purchase price based upon the estimated fair values of the assets acquired and liabilities assumed resulted in nondeductible goodwill of $29,909. The acquisition resulted in goodwill as we expect to accelerate revenue growth by combining our capabilities with Logomix's platform. The operations of this business from its acquisition date are included in our Small Business Services segment. We expect to finalize the allocation of the purchase price by the end of 2018 when our valuation of the acquired intangible assets is completed, as well as the valuation of various other assets acquired and liabilities assumed.

Also during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we acquired the operations of ~~several~~2 small business distributors ~~which~~that are included in our Small Business Services segment. The assets acquired consisted primarily of customer list intangible assets. We expect to finalize the allocations of the purchase price by the end of 2017 when our valuation of the acquired intangible assets is completed, as well as the determination of the related estimated useful lives. As these small business distributors were previously part of our Safeguard distributor network, our revenue was not impacted by these acquisitions, and the impact to our costs was not significant.

In June 2018, we entered into a definitive agreement to acquire a treasury management business that we expect will deliver approximately $36,000 of revenue in 2018. The regulatory conditions related to the acquisition have been satisfied, and we anticipate that the acquisition will close during the third quarter of 2018.

Information regarding goodwill by reportable segment and the useful lives of acquired intangibles ~~and goodwill by reportable segment~~ can be found in Note 3. Information regarding the calculation of the estimated fair values of the acquired intangibles can be found in Note 7. As our acquisitions were immaterial to our reported operating results both individually and in the aggregate, pro forma results of operations are not provided. The following illustrates the preliminary allocation, as of ~~September~~June 30, ~~2017,~~2018, of the aggregate purchase price for the above acquisitions to the assets acquired and liabilities assumed:


(in thousands)	2017 acquisitions			2018 acquisitions
Net tangible assets acquired and liabilities assumed⁽¹⁾	$	5,123		$	(4,791	)
Identifiable intangible assets:
Customer lists/relationships	50,184			21,237
Trade name	9,795
Software to be sold	2,200
Trade names				13,700
Technology-based intangible	800			7,200
Internal-use software	445
Total intangible assets	63,424			42,137
Goodwill	53,549			40,209
Total aggregate purchase price	122,096			77,555
Liabilities for holdback payments	(4,562		)
Net cash paid for 2017 acquisitions	117,534
Liabilities for holdback payments and contingent consideration				(4,015		)
Net cash paid for 2018 acquisitions				73,540
Holdback payments for prior year acquisitions	7,883			16,665
Payments for acquisitions, net of cash acquired of $27,282	$	125,417
Payments for acquisitions, net of cash acquired of $1,645				$	90,205

⁽¹⁾Net ~~tangible assets~~liabilities acquired consisted primarily of ~~accounts receivable, marketable securities, inventory and accrued liabilities of RDM.~~Logomix deferred income taxes.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we finalized ~~the~~ purchase accounting for the acquisitions of ~~BNBS, Inc., Payce, Inc., PTM Document Systems, Inc.~~RDM Corporation, Digital Pacific Group Pty Ltd and ~~Data Support Systems,~~Impact Marketing Specialists, Inc., which were acquired in ~~2016, and we adjusted~~2017. We also recorded adjustments related to the purchase accounting for ~~First Manhattan Consulting Group,~~j2 Global Australia Pty Ltd, doing business as Web24, and SY Holdings, LLC, ~~(FMCG Direct),~~doing business as managed.com, which ~~was~~were also acquired ~~in December 2016.~~during 2017. We expect to finalize the purchase accounting for ~~FMCG Direct by~~these acquisitions in the ~~end~~third quarter of ~~2017~~2018 when our valuation of ~~certain miscellaneous receivables~~property, plant and ~~liabilities~~equipment, as well as the acquired customer list intangible assets, is ~~completed.~~finalized. Further information regarding these acquisitions can be found under the caption “Note 5: Acquisitions” in the Notes to Consolidated Financial Statements appearing in ~~the 2016~~our 2017 Form 10-K. These measurement-period adjustments resulted in ~~a decrease~~an increase in goodwill of ~~$2,130~~$3,616 during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, with the offset to various assets and liabilities, including other current assets, accounts payable and intangibles, including an increase of $3,000 in acquired technology-based intangibles and a decrease of $1,924 in customer list intangibles.

~~During the nine months ended September 30, 2016, we completed the following acquisitions:~~

~~In February 2016, we acquired selected assets of Category 99, Inc., doing business as MacHighway®, a web hosting and domain registration service provider.~~

In March 2016, we acquired selected assets of New England Art Publishers, Inc., doing business as Birchcraft Studios, a supplier of personalized invitations, holiday cards, all-occasion cards and social announcements.

~~In April 2016, we acquired selected assets of 180 Fusion LLC, a digital marketing services provider.~~

~~In June 2016, we acquired selected assets of L.A.M. Enterprises, Inc., a provider of printed and promotional products.~~

~~In June 2016, we acquired selected assets of Liquid Web, LLC, a web hosting services provider.~~

~~In June 2016, we acquired selected assets of National Document Solutions, LLC, a provider of printing, promotional products, office products, scanning and document management solutions.~~

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

the offset to various assets and liabilities, including deferred revenue, deferred income taxes and other long-term liabilities, as well as a decrease of $910 in customer list intangibles and an increase in internal-use software of $1,000.

2017 acquisitions – During the six months ended June 30, 2017, we completed the following acquisitions:

In ~~July 2016,~~February 2017, we acquired selected assets of ~~Inkhead, Inc., a provider of customized promotional products.~~Panthur Pty Ltd, an Australian web hosting and domain registration service provider.

In ~~August 2016, we acquired selected assets of BNBS, Inc., doing business as B&B Solutions, a provider of printing, promotional and office products and services.~~

~~In September 2016,~~April 2017, we acquired all of the equity of ~~Payce, Inc.,~~RDM Corporation of Canada, a provider of ~~payroll processing, payroll tax filing~~remote deposit capture software, hardware and ~~related payroll services.~~digital imaging solutions for financial institutions and corporate clients.

We acquired the operations of several small business distributors, all of which were previously part of our Safeguard distributor network.

Payments for acquisitions, net of cash acquired, as presented on the consolidated statement of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, included payments of ~~$63,103~~$72,470 for these acquisitions and ~~$1,534~~$5,083 for holdback payments for prior year acquisitions. Further information regarding our ~~2016~~2017 acquisitions can be found under the caption “Note 5: Acquisitions” in the Notes to Consolidated Financial Statements appearing in ~~the 2016~~our 2017 Form 10-K.

Note 7: Fair value measurements

~~Annual asset impairment analyses –~~ We evaluate the carrying value of goodwill and our indefinite-lived trade name as of July 31 of each year and between annual evaluations if events occur or circumstances change that would indicate a possible impairment. Our policy on impairment of indefinite-lived intangibles and goodwill, which is included under the caption "Note 1: Significant accounting policies" in the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K, explains our methodology for assessing impairment of these assets.

In conjunction with our annual strategic planning process during the third quarter of 2017, we made various changes to our internal reporting structure. As a result, we reassessed our operating segments and determined that no changes were required in our reportable operating segments. We also reassessed our previously determined reporting units and concluded that a realignment of a portion of our reporting units was required. As such, we reallocated the carrying value of goodwill to our revised reporting units based on their relative fair values. We analyzed goodwill for impairment immediately prior to this realignment by performing qualitative analyses for our Small Business Services reporting units and quantitative analyses for our Financial Services and Direct Checks reporting units. The 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 last quantitative analysis we completed. 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, with the exception of our Small Business Services Safeguard reporting unit. The analysis of this reporting unit, which incorporated the results of the annual strategic planning process, indicated lowered projected long-term revenue growth and profitability levels resulting from changes in market trends and the mix of products and services sold, including the continuing decline in check and forms usage. As a result, we completed impairment analyses of the long-term assets of this reporting unit, excluding goodwill, and concluded that these assets were not impaired. We then completed the quantitative analysis of the reporting unit, utilizing the income approach outlined under the caption "Note 1: Significant accounting policies" in the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K. This quantitative analysis indicated that this reporting unit's goodwill was fully impaired and resulted in a non-cash pre-tax goodwill impairment charge of $28,379 during the quarter ended September 30, 2017. In accordance with ASU No. 2017-04, which we adopted on January 1, 2017, the impairment charge was measured as the amount by which the reporting unit's carrying value exceeded its estimated fair value. Further information regarding this accounting pronouncement can be found in Note 2.

Immediately subsequent to the realignment of our reporting unit structure, we completed a quantitative analysis for all of our reporting units to which goodwill is assigned. This quantitative analysis as of July 31, 2017 indicated that the estimated fair values of our reporting units exceeded their carrying values by approximate amounts between $64,000 and $1,405,000, or by amounts between 36% and 314% above the carrying values of their net assets.

In completing the 2017 annual impairment analysis of our indefinite-lived trade name, we elected to perform a quantitative assessment which indicated that the calculated fair value of the asset exceeded its carrying value of $19,100 by approximately $16,000 as of July 31, 2017.

Non-recurring asset impairment analyses – During the first quarter of 2018, we recorded a pre-tax asset impairment charge of $2,149 related to a Small Business Services customer list intangible asset. Based on changes in the customer base of one of our small business distributors, we determined that the customer list asset was impaired and had an estimated fair market value of $0 (level 3 fair value measurement) as of March 31, 2018.

During the six months ended June 30, 2017, we recorded aggregate pre-tax asset impairment charges of $8,250 related to a small business distributor that was classified as held for sale in the consolidated balance sheets prior to its sale during the second quarter of 2017. The impairment charges were calculated based on ~~on-going~~

~~DELUXE CORPORATION~~

~~CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share amounts)~~

ongoing negotiations for the sale of the business and reduced its carrying value to its fair value less costs to sell of approximately $3,500 (level 3 fair value measurement) by reducing the carrying value of the related customer list intangible asset. Further information regarding assets held for sale can be found in Note 3.

During the quarter ended September 30, 2017, we decided that we would no longer utilize our Small Business Services NEBS® trade name in the marketplace, and we recorded a pre-tax asset impairment charge of $14,752 to write down the remaining book value of this trade name to a fair value of $0. Also during the quarter ended September 30, 2017, we recorded pre-tax asset impairment charges of $3,499 related to other long-lived assets within Small Business Services, primarily internal-use software related to an order capture system. During the third quarter of 2017, we signed a contract for customer relationship management services that resulted in our decision to no longer utilize a portion of this software. As such, the remaining net book value of the assets was written down to a fair value of $0.

~~Information regarding these non-recurring asset impairment analyses is as follows:~~

Fair value measurements using
Fair value as of measurement date Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs Impairment charge
(in thousands) (Level 1) (Level 2) (Level 3)
Trade name $ —
$ —
$ —
$ —
$ 14,752
Assets held for sale 3,500
—
—
3,500
8,250
Other —
—
—
—
3,499
Total $ 26,501

~~2017~~2018 acquisitions – For all acquisitions, we are required to measure the fair value of the net identifiable tangible and intangible assets and liabilities acquired. Information regarding the acquisitions completed during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 can be found in Note 6. The identifiable net assets acquired during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 were comprised primarily of customer list intangible assets, trade names and ~~trade names.~~a technology-related intangible asset. The estimated fair values of the ~~RDM, Digital Pacific~~trade names and ~~Web24~~the technology-related asset were calculated using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the trade name or the technology. Assumed royalty rates were applied to projected revenue for the estimated remaining useful lives of the assets to estimate the royalty savings.

The estimated fair values of the Logomix and ColoCrossing customer ~~list intangibles~~lists were calculated using the multi-period excess earnings method. This valuation model estimates revenues and cash flows derived from the asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as a brand name or fixed assets, that contributed to the generation of the cash flows. The resulting cash flow, which is attributable solely to the customer list asset, is then discounted at a rate of return commensurate with the risk of the asset to calculate a present value. The estimated fair value of the ~~remainder of our~~other acquired ~~customers~~customer lists was calculated by discounting the estimated cash flows expected to be generated by the assets. Key assumptions used in the calculations included same-customer revenue growth rates and estimated customer retention rates based on the acquirees' historical information. The estimated fair values of the Digital Pacific and Web24 trade names were calculated using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the trade name. An assumed royalty rate is applied to forecasted revenue and the resulting cash flows are discounted.

Recurring fair value measurements – Funds held for customers included cash equivalents and available-for-sale ~~marketable~~debt securities (Note 3). The cash equivalents consisted of a money market fund investment that is traded in an active market. Because of the short-term nature of the underlying investments, the cost of this investment approximates its fair value. Available-for-sale ~~marketable~~debt securities consisted of a mutual fund investment that invests in Canadian and provincial government securities and investments in Canadian guaranteed investment certificates (GICs) with maturities of 1 year. The mutual fund 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 fair value of the GICs approximated cost due to their relatively short duration. Unrealized gains

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

and losses, net of tax, are included in accumulated other comprehensive loss in the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue in the consolidated statements of comprehensive income and were not significant for the quarters or ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017.

We have elected to account for long-term investments in domestic mutual funds under the fair value option for financial assets and financial liabilities. The fair value option provides companies an irrevocable option to measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings. The investments are included in long-term investments in the consolidated balance sheets. Long-term investments also include the cash surrender val

~~DELUXE CORPORATION~~

~~CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share amounts)~~

ues of company-owned life insurance policies. Realized and unrealized gains and losses, as well as dividends earned by the mutual fund investments, are included in SG&A expense in the consolidated statements of comprehensive income. These investments correspond to a liability under an officers’ deferred compensation plan that is not available to new participants and is fully funded by the mutual fund investments. The liability under the plan equals the fair value of the mutual fund investments. Thus, as the value of the investments changes, the value of the liability changes accordingly. As changes in the liability are reflected within SG&A expense in the consolidated statements of comprehensive income, the fair value option of accounting for the mutual fund investments allows us to net changes in the investments and the related liability in the statements of comprehensive income. The cost of securities sold is determined using the average cost method. The fair value of the mutual fund investments is determined by obtaining quoted prices in active markets for the mutual funds. Net unrealized losses recognized during the nine months ended September 30, 2017 and net realized gains recognized during the nine months ended September 30, 2017 and September 30, 2016 were not significant. We recognized net unrealized losses of $160 during the nine months ended September 30, 2016.

We have recorded liabilities for contingent consideration related to certain of our acquisitions, primarily the acquisitions of Verify Valid and a small business distributor during 2015 and the acquisition of Data Support Systems, Inc. during 2016. Further information regarding these acquisitions can be found under the caption “Note 5: Acquisitions” in the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K. Under the Verify Valid and Data Support Systems agreements, there are no maximum amounts of contingent payments specified, although payments are based on a percentage of the revenue or operating income generated by the business. The fair value of accrued contingent consideration is remeasured each reporting period. Increases or decreases in projected revenue, gross profit or operating income, as appropriate, and the related probabilities of achieving the forecasted results, may result in a higher or lower fair value measurement. Changes in fair value resulting from changes in the timing, amount of, or likelihood of contingent payments are included in SG&A expense in the consolidated statements of comprehensive income. Changes in fair value resulting from accretion for the passage of time are included in interest expense in the consolidated statements of comprehensive income.

Changes in accrued contingent consideration during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 were as follows:

(in thousands) Nine Months Ended September 30, 2017
Balance, December 31, 2016 $ 4,682
Change in fair value 1,028
Settlements (1,249 )
Balance, September 30, 2017 $ 4,461



(in thousands)	Six Months Ended June 30, 2018
Balance, December 31, 2017	$	3,623
Acquisition date fair value	100
Change in fair value	457
Payments	(863		)
Balance, June 30, 2018	$	3,317

Information regarding ~~recurring~~the fair ~~value measurements completed during each period~~values of our financial instruments was as follows:


				Fair value measurements using													Fair value measurements using
	Fair value as of September 30, 2017			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs			June 30, 2018						Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(in thousands)				(Level 1)		(Level 2)		(Level 3)			Carrying value			Fair value			(Level 1)		(Level 2)		(Level 3)
Measured at fair value through net income:
Accrued contingent consideration											$	(3,317	)	$	(3,317	)	$	—	$	—	$	(3,317	)
Measured at fair value through comprehensive income:
Cash equivalents (funds held for customers)	$	10,000		$	10,000	$	—	$	—		10,000			10,000			10,000		—		—
Available-for-sale marketable securities (funds held for customers)	16,685			—		16,685		—
Long-term investments in mutual funds	1,729			1,729		—		—
Accrued contingent consideration	(4,461		)	—		—		(4,461		)
Available-for-sale debt securities (funds held for customers)											15,897			15,897			—		15,897		—
Amortized cost:
Cash											68,594			68,594			68,594		—		—
Cash (funds held for customers)											66,709			66,709			66,709		—		—
Loans and notes receivable from Safeguard distributors											69,879			60,397			—		—		60,397
Long-term debt⁽¹⁾											765,000			765,000			—		765,000		—

⁽¹⁾Amounts exclude capital lease obligations.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

Fair value measurements using

Fair value as of
December 31, 2016
Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs
(in thousands) (Level 1) (Level 2) (Level 3)
Cash equivalents (funds held for customers) $ 6,002
$ 6,002
$ —
$ —
Available-for-sale marketable securities (funds held for customers) 15,532
—
15,532
—
Long-term investments in mutual funds 1,877
1,877
—
—
Accrued contingent consideration (4,682 ) —
—
(4,682 )



							Fair value measurements using
	December 31, 2017						Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(in thousands)	Carrying value			Fair value			(Level 1)		(Level 2)		(Level 3)
Measured at fair value through net income:
Accrued contingent consideration	$	(3,623	)	$	(3,623	)	$	—	$	—	$	(3,623	)
Measured at fair value through comprehensive income:
Cash equivalents (funds held for customers)	17,300			17,300			17,300		—		—
Available-for-sale debt securities (funds held for customers)	16,613			16,613			—		16,613		—
Amortized cost:
Cash	59,240			59,240			59,240		—		—
Cash (funds held for customers)	52,279			52,279			52,279		—		—
Loans and notes receivable from Safeguard distributors	46,409			44,650			—		—		44,650
Long-term debt⁽¹⁾	707,386			707,938			—		707,938		—

⁽¹⁾Amounts exclude capital lease obligations.

Our policy is to recognize transfers between fair value levels as of the end of the reporting period in which the transfer occurred. There were no transfers between fair value levels during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018.

Note 8: Restructuring and Chief Executive Officer transition costs

~~Fair value measurements of other financial instruments~~Restructuring charges – ~~The following methods and assumptions were used to estimate the fair value of~~Net restructuring charges for each ~~class of financial instrument for which it is practicable to estimate fair value.~~

~~Cash and cash included within funds held for customers – The carrying amounts reported in the consolidated balance sheets approximate fair value because~~period consisted of the ~~short-term nature of these items.~~following components:

Loans and notes receivable from Safeguard distributors – We have receivables for loans made to certain of our Safeguard distributors. In addition, we have acquired the operations of several small business distributors, which we then sold to our Safeguard distributors. In most cases, we entered into notes receivable upon the sale of the assets. The fair value of these loans and notes receivable is calculated as the present value of expected future cash flows, discounted using an estimated interest rate based on published bond yields for companies of similar risk.

Long-term debt – Information regarding the composition of our long-term debt can be found in Note 11. The carrying amounts reported in the consolidated balance sheets for amounts drawn under our revolving credit facility and our term loan facility, excluding unamortized debt issuance costs, approximate fair value because our interest rates are variable and reflect current market rates.



	Quarter Ended June 30,						Six Months Ended June 30,
(in thousands, except number of employees)	2018			2017			2018			2017
Severance accruals	$	3,804		$	1,240		$	4,648		$	2,348
Severance reversals	(95		)	(119		)	(230		)	(518		)
Operating lease obligations	—			23			—			23
Net restructuring accruals	3,709			1,144			4,418			1,853
Other costs	2,662			313			4,275			597
Net restructuring charges	$	6,371		$	1,457		$	8,693		$	2,450
Number of employees included in severance accruals	80			20			105			50

The ~~estimated fair values~~net restructuring charges are reflected in the consolidated statements of ~~these financial instruments were~~comprehensive income as follows:



	Quarter Ended June 30,				Six Months Ended June 30,
(in thousands)	2018		2017		2018		2017
Total cost of revenue	$	736	$	30	$	913	$	9
Operating expenses	5,635		1,427		7,780		2,441
Net restructuring charges	$	6,371	$	1,457	$	8,693	$	2,450

Fair value measurements using
September 30, 2017 Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs
(in thousands) Carrying value Fair value (Level 1) (Level 2) (Level 3)
Cash $ 53,410
$ 53,410
$ 53,410
$ —
$ —
Cash (funds held for customers) 51,762
51,762
51,762
—
—
Loans and notes receivable from Safeguard distributors 45,820
41,987
—
—
41,987
Long-term debt⁽¹⁾
754,580
755,250
—
755,250
—

⁽¹⁾~~Amounts exclude capital lease obligations.~~

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

Fair value measurements using
December 31, 2016 Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs
(in thousands) Carrying value Fair value (Level 1) (Level 2) (Level 3)
Cash $ 76,574
$ 76,574
$ 76,574
$ —
$ —
Cash (funds held for customers) 66,289
66,289
66,289
—
—
Loans and notes receivable from Safeguard distributors 23,278
21,145
—
—
21,145
Long-term debt⁽¹⁾
756,963
758,000
—
758,000
—

⁽¹⁾~~Amounts exclude capital lease obligations.~~

~~Note 8: Restructuring charges~~

~~Net restructuring charges for each period consisted of the following components:~~

Quarter Ended
September 30, Nine Months Ended
September 30,
(in thousands, except number of employees) 2017 2016 2017 2016
Severance accruals $ 1,248
$ 1,824
$ 3,596
$ 3,870
Severance reversals (78 ) (198 ) (596 ) (666 )
Operating lease obligations —
—
23
—
Net restructuring accruals 1,170
1,626

3,023

3,204
Other costs 72
432
669
939
Net restructuring charges $ 1,242
$ 2,058

$ 3,692

$ 4,143
Number of employees included in severance accruals 30
55
80
120

~~The net restructuring charges are reflected in the consolidated statements of comprehensive income as follows:~~

Quarter Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2017 2016 2017 2016
Total cost of revenue $ (25 ) $ 65
$ (16 ) $ 136
Operating expenses 1,267
1,993
3,708
4,007
Net restructuring charges $ 1,242
$ 2,058

$ 3,692

$ 4,143

During the quarters and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~September 30, 2016~~2017, the net restructuring accruals included severance charges related to employee reductions across functional areas as we continued to reduce costs, primarily within our sales, ~~and~~ marketing ~~information technology~~ and fulfillment functions. These charges were reduced by the reversal of restructuring accruals recorded in previous periods, as fewer employees received severance benefits than originally estimated. Other restructuring costs, which were expensed as incurred, included items such as information technology costs, employee and equipment moves, training and travel related to our restructuring and integration activities.

Restructuring accruals of ~~$1,549~~$4,686 as of ~~September~~June 30, ~~2017~~2018 and $~~4,181~~4,380 as of December 31, ~~2016~~2017 are reflected in the consolidated balance sheets as accrued liabilities. The majority of the employee reductions are expected to be completed ~~in 2017,~~by the end of 2018, and we expect most of the related severance payments to be paid by ~~mid-2018,~~mid-2019, utilizing cash from operations. As of ~~September~~June 30, ~~2017~~2018, approximately 1070 of the employees included in our restructuring accruals had not yet started to receive severance benefits.

~~DELUXE CORPORATION~~

~~CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share amounts)~~

Accruals for our restructuring initiatives, summarized by year, were as follows:


(in thousands)	2015 initiatives			2016 initiatives			2017 initiatives			Total			2018 initiatives			2017 initiatives			2016 initiatives			Total
Balance, December 31, 2016	$	80		$	4,101		$	—		$	4,181
Balance, December 31, 2017													$	—		$	4,348		$	32		$	4,380
Restructuring charges	41			485			3,093			3,619			4,530			118			—			4,648
Restructuring reversals	(42		)	(461		)	(93		)	(596		)	(5		)	(220		)	(5		)	(230		)
Payments	(79		)	(3,999		)	(1,577		)	(5,655		)	(555		)	(3,530		)	(27		)	(4,112		)
Balance, September 30, 2017	$	—		$	126		$	1,423		$	1,549
Balance, June 30, 2018													$	3,970		$	716		$	—		$	4,686
Cumulative amounts:
Restructuring charges	$	6,246		$	7,683		$	3,093		$	17,022		$	4,530		$	7,340		$	7,801		$	19,671
Restructuring reversals	(972		)	(742		)	(93		)	(1,807		)	(5		)	(381		)	(750		)	(1,136		)
Payments	(5,274		)	(6,815		)	(1,577		)	(13,666		)	(555		)	(6,243		)	(7,051		)	(13,849		)
Balance, September 30, 2017	$	—		$	126		$	1,423		$	1,549
Balance, June 30, 2018													$	3,970		$	716		$	—		$	4,686

The components of our restructuring accruals, by segment, were as follows:


	Employee severance benefits												Operating lease obligations									Employee severance benefits												Operating lease obligations
(in thousands)	Small Business Services			Financial Services			Direct Checks			Corporate⁽¹⁾			Small Business Services			Financial Services			Total			Small Business Services			Financial Services			Direct Checks			Corporate⁽¹⁾			Small Business Services			Total
Balance, December 31, 2016	$	1,183		$	1,341		$	7		$	1,650		$	—		$	—		$	4,181
Balance, December 31, 2017																						$	789		$	1,398		$	140		$	2,049		$	4		$	4,380
Restructuring charges	1,315			876			—			1,405			23			—			3,619			697			3,680			—			271			—			4,648
Restructuring reversals	(199		)	(89		)	(4		)	(304		)	—			—			(596		)	(48		)	(39		)	(3		)	(140		)	—			(230		)
Payments	(1,979		)	(1,628		)	(3		)	(2,032		)	(13		)	—			(5,655		)	(810		)	(1,250		)	(134		)	(1,914		)	(4		)	(4,112		)
Balance, September 30, 2017	$	320		$	500		$	—		$	719		$	10		$	—		$	1,549
Cumulative amounts⁽²⁾:
Balance, June 30, 2018																						$	628		$	3,789		$	3		$	266		$	—		$	4,686
Cumulative amounts:⁽²⁾
Restructuring charges	$	6,162		$	4,228		$	143		$	6,069		$	367		$	53		$	17,022		$	5,333		$	7,782		$	286		$	6,188		$	82		$	19,671
Restructuring reversals	(869		)	(248		)	(6		)	(684		)	—			—			(1,807		)	(402		)	(114		)	(9		)	(611		)	—			(1,136		)
Inter-segment transfer	41			(14		)	—			(27		)	—			—			—
Payments	(5,014		)	(3,466		)	(137		)	(4,639		)	(357		)	(53		)	(13,666		)	(4,303		)	(3,879		)	(274		)	(5,311		)	(82		)	(13,849		)
Balance, September 30, 2017	$	320		$	500		$	—		$	719		$	10		$	—		$	1,549
Balance, June 30, 2018																						$	628		$	3,789		$	3		$	266		$	—		$	4,686

⁽¹⁾As discussed in Note 14, corporate costs are allocated to our business segments. As such, the net corporate restructuring charges are reflected in the business segment operating income presented in Note 14 in accordance with our allocation methodology.

⁽²⁾Includes accruals related to our cost reduction initiatives for ~~2015~~2016 through ~~2017.~~2018.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

Chief Executive Officer (CEO) transition costs – In April 2018, we announced the upcoming retirement of Mr. Lee Schram, our CEO. Mr. Schram will continue to serve as CEO during the transition process and will remain employed under the terms of a transition agreement through March 1, 2019. Under the terms of the transition agreement, if Mr. Schram remains employed through March 1, 2019, assists with the transition, and complies with certain covenants, we will provide to Mr. Schram certain benefits, including a transition bonus in the amount of $2,000, accelerated vesting of certain restricted stock unit awards and continued vesting and settlement of a pro-rata portion of outstanding performance share awards to the extent such awards are earned based on the attainment of certain performance goals. We anticipate the modifications to Mr. Schram's share-based payment awards will result in expense of $2,088, which will be recognized through March 2019.

We also offered retention agreements to certain members of our management team under which each employee will be entitled to receive a cash bonus equal to his or her annual base salary or up to 1.5 times his or her annual base salary if he or she remains employed during the retention period, generally from July 1, 2018 to December 31, 2019, and complies with certain covenants. The retention bonus will be paid to an employee if his or her employment is terminated without cause before the end of the retention period. In addition, we are incurring costs related to the CEO transition process, such as executive search fees, travel and board of directors fees. CEO retirement and transition costs included within SG&A expense for the quarter and six months ended June 30, 2018 totaled $1,530, including the impact of modifications to Mr. Schram’s share-based payment awards.

Note 9: Income tax provision

~~Our effective income tax rate for the quarter ended September 30, 2017 was 41.2% compared to our annual effective income tax rate for 2016 of 32.6%.~~ The ~~significant change in the~~ effective tax rate ~~for the third quarter of 2017 was due primarily~~on pre-tax income reconciles to the non-deductible portion of the goodwill impairment charge recorded during the quarter. The entire income tax effect of this item was reflected in our income tax provision for the third quarter of 2017 and resulted in an increase in our third quarter 2017 effectiveUnited States federal statutory tax rate of ~~7.1 points.~~ 21% for 2018 and 35% for 2017 as follows:



	Six Months Ended June 30, 2018		Year Ended December 31, 2017
Income tax at federal statutory rate	21.0	%	35.0	%
State income tax expense, net of federal benefit	3.3	%	2.7	%
Goodwill impairment charge	—		1.5	%
Impact of the 2017 Act	0.1	%	(6.6	%)
Qualified production activities deduction	—		(3.2	%)
Net tax benefit of share-based compensation	(1.1	%)	(1.6	%)
Other	0.7	%	(1.4	%)
Effective tax rate	24.0	%	26.4	%

Further information regarding the ~~asset impairment charge~~impact on our financial statements of the 2017 Act can be found in Note 7.2 and under the caption “Note 9: Income tax provision” in the Notes to Consolidated Financial Statements appearing in our 2017 Form 10-K.

Note 10: Postretirement benefits

We have historically provided certain health care benefits for a portion of our retired ~~U.S.~~United States employees. In addition to our retiree health care plan, we also have a supplemental executive retirement plan in the United States. Further information regarding our postretirement benefit plans can be found under the caption “Note 12: Postretirement benefits” in the Notes to Consolidated Financial Statements appearing in our 2017 Form 10-K.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

~~regarding our postretirement benefit plans can be found under the caption “Note 12: Postretirement benefits” of the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K.~~

Postretirement benefit income for each period consisted of the following components:



	Quarter Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017
Interest cost	$	656		$	724		$	1,313		$	1,448
Expected return on plan assets	(1,934		)	(1,782		)	(3,868		)	(3,564		)
Amortization of prior service credit	(355		)	(355		)	(711		)	(711		)
Amortization of net actuarial losses	721			909			1,442			1,819
Net periodic benefit income	$	(912	)	$	(504	)	$	(1,824	)	$	(1,008	)

Quarter Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2017 2016 2017 2016
Interest cost $ 724
$ 780
$ 2,172
$ 2,339
Expected return on plan assets (1,782 ) (1,834 ) (5,346 ) (5,501 )
Amortization of prior service credit (355 ) (355 ) (1,066 ) (1,066 )
Amortization of net actuarial losses 909
949
2,728
2,848
Net periodic benefit income $ (504 ) $ (460 ) $ (1,512 ) $ (1,380 )

Effective January 1, 2018, we adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,which required us to reclassify postretirement benefit income from cost of revenue and SG&A expense to other income in our consolidated statements of comprehensive income. Further information can be found in Note 2.

Note 11: Debt

Debt outstanding was comprised of the following:


(in thousands)	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Amount drawn on revolving credit facility	$	450,000		$	428,000		$	765,000		$	413,000
Amount outstanding under term loan facility	305,250			330,000			—			294,938
Capital lease obligations	1,818			1,685			1,804			1,914
Long-term debt, principal amount	757,068			759,685			766,804			709,852
Less unamortized debt issuance costs	(579		)	(927		)	—			(471		)
Less current portion of long-term debt	(42,057		)	(35,952		)	(765		)	(44,121		)
Long-term debt	714,432			722,806			766,039			665,260

Current portion of amount drawn under term loan facility	41,250			35,063			—			43,313
Current portion of capital lease obligations	807			889			765			808
Long-term debt due within one year, principal amount	42,057			35,952			765			44,121
Less unamortized debt issuance costs	(91		)	(110		)	—			(81		)
Long-term debt due within one year	41,966			35,842			765			44,040
Total debt	$	756,398		$	758,648		$	766,804		$	709,300

In March 2018, we entered into a revolving credit facility in the amount of $950,000, subject to increase under the credit agreement to an aggregate amount not exceeding $1,425,000. The credit facility matures in March 2023. Our previous credit facility agreement was terminated contemporaneously with our entry into the new credit facility and was repaid utilizing proceeds from the new credit facility. Our quarterly commitment fee ranges from 0.175% to 0.35% based on our leverage ratio. As of June 30, 2018, $765,000 was drawn on our revolving credit facility at a weighted-average interest rate of 3.24%. As of December 31, 2017, $413,000 was drawn on our previous revolving credit facility at a weighted-average interest rate of 2.98%. Our previous credit facility agreement also included a term loan facility. As of December 31, 2017, $294,938 was outstanding under the term loan facility at a weighted-average interest rate of 2.99%. This amount was repaid in March 2018, utilizing proceeds from the new revolving credit facility.

There are currently no limitations on the amount of dividends and share repurchases under the terms of our credit agreement. However, if our leverage ratio, defined as total debt less unrestricted cash to EBITDA, should exceed 2.75 to one, there would be an annual limitation on the amount of dividends and share ~~repurchases under the terms of this agreement.~~repurchases.

As of September 30, 2017, we had a $525,000 revolving credit facility that matures in February 2019. Our quarterly commitment fee ranges from 0.20% to 0.40% based on our leverage ratio. As of September 30, 2017, $450,000 was drawn on our revolving credit facility at a weighted-average interest rate of 2.69%. As of December 31, 2016, $428,000 was drawn on our revolving credit facility at a weighted-average interest rate of 2.22%.

During 2016, we amended the credit agreement governing our credit facility to include a variable rate term loan facility in the aggregate amount of $330,000. We borrowed the full amount during the fourth quarter of 2016 using the proceeds to retire our senior notes due in 2020 and to partially fund the acquisition of FMCG Direct in December 2016. The term loan facility matures in February 2019 and requires periodic principal payments throughout the term of the loan. Interest is paid weekly and we may prepay the term loan facility in full or in part at our discretion. Amounts repaid may not be reborrowed. As of September 30, 2017, $305,250 was outstanding under the term loan facility at a weighted-average interest rate of 2.70%. As of December 31, 2016, $330,000 was outstanding under the term loan facility at a weighted-average interest rate of 2.27%.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

Borrowings under the credit agreement are collateralized by substantially all of our personal and intangible property. The credit agreement governing our credit facility contains customary covenants regarding limits on levels of subsidiary indebtedness and capital expenditures, liens, investments, acquisitions, certain mergers, certain asset sales outside the ordinary course of business, and change in control as defined in the agreement. The agreement also ~~contains~~requires us to maintain certain financial ~~covenants regarding our~~ratios, including a maximum leverage ratio of 3.5 and a minimum ratio of consolidated earnings before interest ~~coverage~~ and ~~liquidity.~~taxes to consolidated interest expense, as defined in the credit agreement, of 3.0.

Daily average amounts outstanding under our current and previous credit facility were as follows:


(in thousands)	Nine Months Ended September 30,			Year Ended December 31, 2016			Six Months Ended June 30, 2018			Year Ended December 31, 2017
Revolving credit facility:
Daily average amount outstanding	$	441,894		$	417,219		$	599,182		$	436,588
Weighted-average interest rate	2.48		%	1.93		%	3.01		%	2.55		%
Term loan facility:
Daily average amount outstanding	$	320,118		$	52,381		$	128,331		$	315,862
Weighted-average interest rate	2.51		%	1.52		%	2.97		%	2.57		%

As of ~~September~~June 30, ~~2017~~2018, amounts were available for borrowing under our revolving credit facility as follows:


(in thousands)	Total available			Total available
Revolving credit facility commitment	$	525,000		$	950,000
Amount drawn on revolving credit facility	(450,000		)	(765,000		)
Outstanding letters of credit⁽¹⁾	(10,361		)	(10,128		)
Net available for borrowing as of September 30, 2017	$	64,639
Net available for borrowing as of June 30, 2018				$	174,872

⁽¹⁾We use standby letters of credit to collateralize certain obligations related primarily to our self-insured workers’ compensation claims, as well as claims for environmental matters, as required by certain states. These letters of credit reduce the amount available for borrowing under our revolving credit facility.

~~The aggregate debt maturities for our revolving line of credit and our term loan facility as of September 30, 2017 were as follows:~~

(in thousands) Debt maturities
Remainder of 2017 $ 10,313
2018 43,313
2019 701,624
Total $ 755,250

In addition to amounts outstanding under our credit facility, we had capital lease obligations of ~~$1,818~~$1,804 as of ~~September~~June 30, ~~2017~~2018 and ~~$1,685~~$1,914 as of December 31, ~~2016~~2017 related to information technology hardware. The lease obligations will be paid through ~~June~~November 2021. The related assets are included in property, plant and equipment in the consolidated balance sheets. Depreciation of the leased assets is included in depreciation expense in the consolidated statements of cash flows.

Note 12: Other commitments and contingencies

Indemnifications – In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. These ~~indemnifications~~indemnification provisions generally encompass third-party claims arising from our products and services, including, without limitation, service failures, breach of security, intellectual property rights, governmental regulations and/or employment-related matters. Performance under these indemnities would generally be triggered by our breach of the terms of the contract. In disposing of assets or businesses, we often provide representations, warranties and/or indemnities to cover

~~DELUXE CORPORATION~~

~~CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share amounts)~~

various risks, including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal matters related to periods prior to disposition. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we do not believe that any liability under these indemnities would have a material adverse effect on our financial position, annual results of operations or annual cash flows. We have recorded liabilities for known indemnifications related to environmental matters.

Environmental matters – We are currently involved in environmental compliance, investigation and remediation activities at some of our ~~current and~~ former sites, primarily printing facilities of our Financial Services and Small Business Services segments that have been sold. Remediation costs are accrued on an undiscounted basis when the obligations are either known or considered probable and can be reasonably estimated. Remediation or testing costs that result directly from the sale of an asset

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

and ~~which~~that we would not have otherwise incurred are considered direct costs of the sale of the asset. As such, they are included in our measurement of the carrying value of the asset sold.

Accruals for environmental matters were $~~2,717~~2,383 as of ~~September~~June 30, ~~2017~~2018 and $~~3,206~~2,646 as of December 31, ~~2016~~2017~~, primarily related to facilities that have been sold.~~. These accruals are included in accrued liabilities and other non-current liabilities in the consolidated balance sheets. Accrued costs consist of direct costs of the remediation activities, primarily fees that will be paid to outside engineering and consulting firms. Although recorded accruals include our best estimates, our total costs cannot be predicted with certainty due to various factors, such as the extent of corrective action that may be required, evolving environmental laws and regulations and advances in environmental technology. Where the available information is sufficient to estimate the amount of the liability, that estimate is used. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range is recorded. We do not believe that the range of possible outcomes could have a material effect on our financial condition, results of operations or liquidity. Environmental expense was ~~$195~~not significant for the ~~nine~~quarters or six months ended ~~September~~June 30, 2018 and 2017. The consolidated statement of comprehensive income for the nine months ended September 30, 2016 included a benefit from environmental matters of $1,759, as we reversed a portion of the liability for one of our sold facilities. During the second quarter of 2016, we determined that it was no longer probable that a portion of the estimated environmental remediation costs for this location would be incurred.

We purchased an insurance policy during 2002 that covers up to $10,000 of third-party pollution claims through 2032 at certain owned, leased and divested sites. We also purchased an insurance policy during 2009 that covers up to $15,000 of third-party pollution claims through April 2019 at certain other sites. These policies cover liability for claims of bodily injury or property damage arising from pollution events at the covered facilities, as well as remediation coverage should we be required by a governing authority to perform remediation activities at the covered sites. No accruals have been recorded in our consolidated financial statements for any of the events contemplated in these insurance policies. We do not anticipate significant net cash outlays for environmental matters during ~~2017.~~2018.

Self-insurance – We are self-insured for certain costs, primarily workers' compensation claims and medical and dental benefits for active employees and those employees on long-term disability. The liabilities associated with these items represent our best estimate of the ultimate obligations for reported claims plus those incurred, but not reported, and totaled ~~$7,480~~$7,195 as of ~~September~~June 30, ~~2017~~2018 and ~~$6,999~~$7,679 as of December 31, ~~2016.~~2017. These accruals are included in accrued liabilities and other non-current liabilities in the consolidated balance sheets. Our workers' compensation liability is recorded at present value. The difference between the discounted and undiscounted liability was not significant as of ~~September~~June 30, ~~2017~~2018 or December 31, ~~2016.~~2017.

Our self-insurance liabilities are estimated, in part, by considering historical claims experience, demographic factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future events and claims differ from these assumptions and historical trends.

Litigation – Recorded liabilities for legal matters were not material to our financial position, results of operations or liquidity during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, and we do not believe that any of the currently identified claims or litigation will materially affect our financial position, results of operations or liquidity upon resolution. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on our financial position, results of operations or liquidity ~~for~~in the period in which the ruling occurs or in future periods.

~~DELUXE CORPORATION~~

~~CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share amounts)~~

Note 13: Shareholders’ equity

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we repurchased ~~a total of 709~~573 thousand shares for ~~$50,070. A portion of these~~$39,996. These share repurchases were completed under an ~~outstanding~~ authorization from our board of directors ~~to purchase up to 10 million shares of our common stock. As of December 31,~~in May 2016 ~~65 thousand shares remained available for purchase under this authorization and we completed the purchase of all of these remaining shares during the quarter ended March 31, 2017.~~

~~The remainder of the share repurchases completed during the nine months ended September 30, 2017 were completed under an additional authorization from our board of directors~~ for the repurchase of up to $300,000 of our common ~~stock, effective at the conclusion of the previous authorization.~~stock. This ~~additional~~ authorization has no expiration date, and ~~$254,656~~$199,731 remained available for purchase under this authorization as of ~~September~~June 30, ~~2017.~~2018.

Note 14: Business segment information

We operate 3 reportable business segments: Small Business Services, Financial Services and Direct Checks. Our business segments are generally organized by type of customer served and reflect the way we manage the company. Small Business Services promotes and sells products and services to small businesses via direct response mail and internet advertising; referrals from financial institutions, telecommunications clients and ~~other partners;~~others; networks of Safeguard distributors and independent dealers; a direct sales force that focuses on selling to and through major accounts; and an outbound telemarketing

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

group. Financial Services' products and services are sold primarily through a direct sales force ~~which~~that executes product and service supply contracts with our financial institution clients, ~~nationwide,~~ including banks, credit unions and financial services companies. In the case of check supply contracts, once the financial institution relationship is established, consumers may submit their check orders through their financial institution or over the phone or internet. Direct Checks sells products and services directly to consumers using direct marketing, including print advertising and search engine marketing and optimization strategies. All 3 segments operate primarily in the United ~~States.~~States, although Small Business Services ~~also~~ has operations in Canada, Australia and portions of ~~Europe.~~Europe, and Financial Services has operations in Canada.

Our product and service offerings are comprised of the following:

Checks – We remain one of the largest providers of checks in the United States. During ~~2016,~~2017, checks represented ~~39.1%~~39% of our Small Business Services segment's revenue, ~~53.8%~~43% of our Financial Services segment's revenue and ~~84.1%~~84% of our Direct Checks segment's revenue.

Marketing solutions and other services (MOS) – We offer products and services designed to meet our customers' sales and marketing needs, as well as various other service offerings. During 2017, MOS represented 34% of our Small Business Services segment's revenue, 55% of our Financial Services segment's revenue and 11% of our Direct Checks segment's revenue. Our MOS offerings generally consist of the following:

Small business marketing solutions – Our marketing products utilize digital printing and web-to-print solutions to provide printed marketing materials and promotional solutions, such as postcards, brochures, retail packaging supplies, apparel, greeting cards and business cards. ~~Our web~~

Web services – These service offerings for small businesses include hosting and domain name services; logo and web design; ~~hosting and other web services;~~ search engine marketing and optimization; and payroll services.

Data-driven marketing ~~programs, including email, mobile~~solutions – These Financial Services offerings include outsourced marketing campaign targeting and ~~social media. We also offer~~execution and marketing analytics solutions that help our customers grow revenue through strategic targeting, lead optimization, retention and cross-selling services.

Treasury management solutions – These Financial Services solutions include remote deposit capture, receivables management, payment processing, and paperless treasury management, as well as software, hardware and digital imaging solutions.

Fraud, security, risk management and operational services – These service offerings include fraud protection and security services, ~~online and offline payroll services, and~~ electronic checks ("eChecks"). Our Financial Services segment also offers a suite of financial technology ("FinTech") solutions. These solutions include data-driven marketing solutions, including outsourced marketing campaign targeting and execution; treasury management solutions; and digital engagement solutions, including loyalty and rewards programs.

Forms, accessories and other products – Our Small Business Services segment provides printed forms to small businesses, including deposit tickets, billing forms, work orders, job proposals, purchase orders, invoices and personnel ~~forms. This segment also offers~~forms, as well as computer forms compatible with accounting software packages commonly used by small businesses. ~~Forms sold by our Financial Services and Direct Checks segments include deposit tickets and check registers.~~

~~Accessories and other products~~ – Small Business Services also offers ~~products designed to supply small business owners with the~~other customized ~~documents necessary to efficiently manage their business,~~products, including envelopes, office supplies, ink stamps and labels. Our Financial Services and Direct Checks segments offer deposit tickets, check registers, checkbook covers, labels and ink stamps.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

The following tables present revenue disaggregated by our product and service offerings:



	Quarter Ended June 30, 2018
(in thousands)	Small Business Services		Financial Services		Direct Checks		Consolidated
Checks	$	119,786	$	57,591	$	26,196	$	203,573
Marketing solutions and other services:
Small business marketing solutions	69,442		—		—		69,442
Web services	40,850		—		—		40,850
Data-driven marketing solutions	—		37,327		—		37,327
Treasury management solutions	—		28,558		—		28,558
Fraud, security, risk management and operational services	6,588		12,596		3,444		22,628
Total MOS	116,880		78,481		3,444		198,805
Forms, accessories and other products	81,076		3,243		1,547		85,866
Total revenue	$	317,742	$	139,315	$	31,187	$	488,244

	Six Months Ended June 30, 2018
(in thousands)	Small Business Services		Financial Services		Direct Checks		Consolidated
Checks	$	242,719	$	115,642	$	55,550	$	413,911
Marketing solutions and other services:
Small business marketing solutions	136,204		—		—		136,204
Web services	78,226		—		—		78,226
Data-driven marketing solutions	—		74,467		—		74,467
Treasury management solutions	—		57,758		—		57,758
Fraud, security, risk management and operational services	13,104		24,903		7,301		45,308
Total MOS	227,534		157,128		7,301		391,963
Forms, accessories and other products	163,803		7,186		3,295		174,284
Total revenue	$	634,056	$	279,956	$	66,146	$	980,158

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)



	Quarter Ended June 30, 2017
(in thousands)	Small Business Services		Financial Services		Direct Checks		Consolidated
Checks	$	120,173	$	62,351	$	29,193	$	211,717
Marketing solutions and other services:
Small business marketing solutions	63,168		—		—		63,168
Web services	30,090		—		—		30,090
Data-driven marketing solutions	—		36,157		—		36,157
Treasury management solutions	—		29,045		—		29,045
Fraud, security, risk management and operational services	6,610		16,712		3,747		27,069
Total MOS	99,868		81,914		3,747		185,529
Forms, accessories and other products	82,834		3,480		1,672		87,986
Total revenue	$	302,875	$	147,745	$	34,612	$	485,232

	Six Months Ended June 30, 2017
(in thousands)	Small Business Services		Financial Services		Direct Checks		Consolidated
Checks	$	244,310	$	127,726	$	61,854	$	433,890
Marketing solutions and other services:
Small business marketing solutions	122,677		—		—		122,677
Web services	60,334		—		—		60,334
Data-driven marketing solutions	—		68,231		—		68,231
Treasury management solutions	—		51,819		—		51,819
Fraud, security, risk management and operational services	13,243		33,323		8,003		54,569
Total MOS	196,254		153,373		8,003		357,630
Forms, accessories and other products	170,434		7,440		3,604		181,478
Total revenue	$	610,998	$	288,539	$	73,461	$	972,998

Product revenue is recognized at a point in time. Total MOS revenue included product revenue of $70,496 and service revenue of $128,309 for the quarter ended June 30, 2018 and product revenue of $135,147 and service revenue of $256,816 for the six months ended June 30, 2018. The majority of our service revenue is recognized over time as services are provided.

The following tables present our revenue disaggregated by geography, based on where items are shipped or services are performed.



(in thousands)	Small Business Services		Financial Services		Direct Checks		Total
Quarter Ended June 30, 2018:
United States	$	290,863	$	134,040	$	31,187	$	456,090
Foreign, primarily Canada and Australia	26,879		5,275		—		32,154
Total revenue	$	317,742	$	139,315	$	31,187	$	488,244
Six Months Ended June 30, 2018:
United States	$	580,822	$	269,206	$	66,146	$	916,174
Foreign, primarily Canada and Australia	53,234		10,750		—		63,984
Total revenue	$	634,056	$	279,956	$	66,146	$	980,158

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)



(in thousands)	Small Business Services		Financial Services		Direct Checks		Total
Quarter Ended June 30, 2017:
United States	$	283,522	$	142,540	$	34,612	$	460,674
Foreign, primarily Canada and Australia	19,353		5,205		—		24,558
Total revenue	$	302,875	$	147,745	$	34,612	$	485,232
Six Months Ended June 30, 2017:
United States	$	572,666	$	283,334	$	73,461	$	929,461
Foreign, primarily Canada and Australia	38,332		5,205		—		43,537
Total revenue	$	610,998	$	288,539	$	73,461	$	972,998

The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in ~~the 2016~~our 2017 Form 10-K. We allocate corporate costs for our shared services functions to our business

~~DELUXE CORPORATION~~

~~CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(dollars in thousands, except per share amounts)~~

segments, including costs of our executive management, human resources, supply chain, finance, information technology and legal functions. ~~Generally, where~~Where costs incurred are directly attributable to a business segment, ~~primarily within the areas of information technology, supply chain, finance and legal,~~ those costs are charged directly to that segment. ~~Because we use a shared services approach for many of our functions, certain~~During 2017, costs ~~are~~that were not directly attributable to a business ~~segment. These costs are~~segment were allocated to ~~our business~~the segments based on segment ~~revenue, as revenue is~~revenue. Effective January 1, 2018, we completed a ~~measure~~more detailed analysis of our corporate costs and were able to allocate substantially all of the ~~relative size and magnitude~~costs directly to our business segments. The costs that were not directly attributable to a business segment, primarily certain human resources costs, were allocated to the segments based on the number of ~~each segment and indicates the level of corporate shared services consumed by~~employees in each segment. This change in our allocation methodology did not have a significant impact on the operating results of our business segments. Corporate assets are not allocated to the segments and ~~consist~~consisted primarily of ~~property, plant~~long-term investments and ~~equipment; internal-use software; and inventories and supplies~~assets related to our corporate shared services functions of manufacturing, information technology and real estate, ~~as well as long-term investments.~~including property, plant and equipment; internal-use software; and inventories and supplies.

We are an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations and the sharing of assets. Therefore, we do not represent that these segments, if operated independently, would report the operating income and other financial information shown.

~~The following is our segment information as of and for the quarters ended~~ ~~September 30, 2017~~ ~~and~~ ~~2016~~:

Reportable Business Segments
(in thousands) Small Business Services Financial Services Direct Checks Corporate Consolidated
Total revenue from external customers: 2017 $ 306,408
$ 157,407
$ 33,854
$ —
$ 497,669
2016 298,931
123,033
36,956
—
458,920
Operating income: 2017 13,213
29,347
11,296
—
53,856
2016 50,670
28,708
12,914
—
92,292
Depreciation and amortization expense: 2017 14,502
15,935
809
—
31,246
2016 13,315
8,876
868
—
23,059
Asset impairment charges: 2017 46,630
—
—
—
46,630
2016 —
—
—
—
—
Total assets: 2017 1,051,076
692,511
159,526
276,867
2,179,980
2016 1,075,661
434,374
160,624
270,489
1,941,148
Capital asset purchases: 2017 —
—
—
11,563
11,563
2016 —
—
—
10,031
10,031

The following is our segment information as of and for the nine months ended September 30, 2017 and 2016:

Reportable Business Segments
(in thousands) Small Business Services Financial Services Direct Checks Corporate Consolidated
Total revenue from external customers: 2017 $ 917,406
$ 445,946
$ 107,314
$ —
$ 1,470,666

2016 877,384
374,511
116,965
—
1,368,860
Operating income: 2017 120,633
76,500
35,555
—
232,688
2016 150,776
84,467
40,640
—
275,883
Depreciation and amortization expense: 2017 42,158
46,709
2,430
—
91,297

2016 38,195
26,888
2,628
—
67,711
Asset impairment charges: 2017 54,880
—
—
—
54,880
2016 —
—
—
—
—
Total assets: 2017 1,051,076
692,511
159,526
276,867
2,179,980
2016 1,075,661
434,374
160,624
270,489
1,941,148
Capital asset purchases: 2017 —
—
—
34,351
34,351
2016 —
—
—
32,215
32,215

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

The following is our segment information as of and for the quarters ended June 30, 2018 and 2017:



		Reportable Business Segments
(in thousands)		Small Business Services		Financial Services		Direct Checks		Corporate		Consolidated
Total revenue from external customers:	2018	$	317,742	$	139,315	$	31,187	$	—	$	488,244
	2017	302,875		147,745		34,612		—		485,232
Operating income:	2018	58,642		13,980		10,201		—		82,823
	2017	54,521		26,609		11,697		—		92,827
Depreciation and amortization expense:	2018	16,154		15,422		800		—		32,376
	2017	13,439		16,161		814		—		30,414
Asset impairment charges:	2018	—		—		—		—		—
	2017	2,954		—		—		—		2,954
Total assets:	2018	1,165,781		662,076		157,649		307,738		2,293,244
	2017	1,042,694		697,900		159,246		268,915		2,168,755
Capital asset purchases:	2018	—		—		—		14,006		14,006
	2017	—		—		—		11,767		11,767

The following is our segment information as of and for the six months ended June 30, 2018 and 2017:

		Reportable Business Segments
(in thousands)		Small Business Services		Financial Services		Direct Checks		Corporate		Consolidated
Total revenue from external customers:	2018	$	634,056	$	279,956	$	66,146	$	—	$	980,158
	2017	610,998		288,539		73,461		—		972,998
Operating income:	2018	117,541		31,954		21,036		—		170,531
	2017	106,782		46,854		24,189		—		177,825
Depreciation and amortization expense:	2018	31,592		30,316		1,609		—		63,517
	2017	27,656		30,774		1,621		—		60,051
Asset impairment charges:	2018	2,149		—		—		—		2,149
	2017	8,250		—		—		—		8,250
Total assets:	2018	1,165,781		662,076		157,649		307,738		2,293,244
	2017	1,042,694		697,900		159,246		268,915		2,168,755
Capital asset purchases:	2018	—		—		—		28,040		28,040
	2017	—		—		—		22,788		22,788

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:

Executive Overview that discusses what we do, our operating results at a high level and our financial outlook for the ~~year.~~year;

Consolidated Results of Operations, Restructuring and CEO Transition Costs, and Segment Results that includes a more detailed discussion of our revenue and ~~expenses.~~expenses;

Cash Flows and Liquidity, Capital Resources and Other Financial Position Information that discusses key aspects of our cash flows, capital structure and financial ~~position.~~position;

Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations that discusses our financial ~~commitments.~~commitments; and

Critical Accounting Policies that discusses the policies we believe are important to understanding the assumptions and judgments underlying our financial statements.

~~You should~~Please note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Known material risks are discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 (the ~~"2016~~"2017 Form 10-K") and are incorporated into this Item 2 of this report on Form 10-Q as if fully stated herein. Although we have attempted to compile a comprehensive list of these important factors, we want to caution you that other factors may prove to be important in affecting future operating results. New factors emerge from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor or combination of factors may have on our business. ~~You are~~We further ~~cautioned~~caution you not to place undue reliance on those forward-looking statements because they speak only of our views as of the date the statements were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The Private Securities Litigation Reform Act of 1995 (the ~~Reform Act)~~"Reform Act") provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. We are filing this cautionary statement in connection with the Reform Act. When we use the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” “outlook,” "forecast" or similar expressions in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission, in our press releases and in oral statements made by our representatives, they indicate forward-looking statements within the meaning of the Reform Act.

Our unaudited consolidated statements of comprehensive income for the quarter and six months ended June 30, 2017 have been revised to reflect the adoption of Accounting Standards Update (ASU) No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. In accordance with this standard, we reclassified the entire amount of our net periodic benefit income from cost of revenue and selling, general and administrative (SG&A) expense to other income in our consolidated statements of comprehensive income. This revision had no impact on net income.

EXECUTIVE OVERVIEW

~~Checks~~ – We ~~remain one of the largest providers of checks in the United States. During 2016, checks represented~~ ~~39.1%~~ ~~of our~~operate 3 reportable business segments: Small Business Services, ~~segment's revenue, 53.8% of our Financial Services segment's revenue and 84.1% of our Direct Checks segment's revenue.~~

~~Marketing solutions and other services~~ – We offer products and services designed to meet our customers' sales and marketing needs, as well as various other service offerings. Our marketing products utilize digital printing and web-to-print solutions to provide promotional solutions such as postcards, brochures, retail packaging supplies, apparel, greeting cards and business cards. Our web services offerings include logo and web design; hosting and other web services; search engine optimization; and marketing programs, including email, mobile and social media. We also offer fraud protection and security services, online and offline payroll services, and electronic checks ("eChecks"). Our Financial Services segment also offers a suite of financial technology ("FinTech") solutions. These solutions include data-driven marketing solutions, including outsourced marketing campaign targeting and execution; treasury management solutions; and digital engagement solutions, including loyalty and rewards programs.

~~Forms~~ – Our Small Business Services segment is a leading provider of printed forms to small businesses, including deposit tickets, billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. This segment also offers computer forms compatible with accounting software packages commonly used by small businesses. Forms sold by our Financial Services and Direct ~~Checks~~Checks. Our business segments ~~include deposit tickets~~are generally organized by type of customer served and ~~check registers.~~reflect the way we manage the company. Information regarding our product and service offerings can be found under the caption "Note 14: Business segment information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.

~~Accessories and other products~~ – Small Business Services offers products designed to provide small business owners with the customized documents necessary to efficiently manage their business, including envelopes, office supplies, stamps and labels. Our Financial Services and Direct Checks segments offer checkbook covers and stamps.

~~Throughout~~Over the past several years, we have focused on opportunities to increase revenue and operating income ~~while maintaining strong operating margins,~~ despite the continuing secular decline in check and forms usage. These opportunities have included new product and service offerings, brand awareness and positioning initiatives, investing in technology for our service offerings, enhancing our information technology capabilities and infrastructure, improving customer segmentation, extending the reach of our sales ~~channel reach,~~channels, and reducing costs. In addition, we invested in various acquisitions that extend the range of products and services we offer to our customers, primarily marketing solutions and other services (MOS) offerings. Information about our acquisitions can be found under the captions "Note 6: Acquisitions" ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report and under the caption "Note 5: Acquisitions" ofin the Notes to Consolidated Financial Statements appearing in ~~the 2016~~our 2017 Form 10-K. During the remainder of ~~2017,~~2018, we plan to continue our focus in these areas, with an emphasis on profitable revenue growth and increasing the mix of MOS revenue, primarily data-driven marketing solutions, treasury management solutions and ~~other services revenue.~~web services. We ~~also plan to~~ continue to assess ~~small-to-medium-sized~~ acquisitions that complement our large customer bases, with a focus on ~~marketing solutions and other services.~~MOS offerings. A more detailed discussion of our business strategies can be found under the caption "Business Segments" appearing in Item 1 of ~~the 2016~~our 2017 Form 10-K.

Earnings for the first ~~nine~~six months of ~~2017,~~2018, as compared to the first ~~nine~~six months of ~~2016, decreased~~2017, increased due to ~~pre-tax asset impairment charges of $54.9 million~~a lower effective income tax rate in ~~2017, volume reductions for personal and business checks and forms~~2018, largely due ~~primarily~~ to the ~~continuing decline in check~~Tax Cuts and forms usage, investments in revenue growth opportunities, and increased performance-based compensation, medical and legal costs, as well as higher material and delivery rates in 2017. These decreases in earnings were partially offset byJobs Act of 2017 (the "2017 Act"), the benefit of price increases and continuing initiatives to reduce our cost structure, primarily within our sales, marketing and fulfillment organizations, ~~and aggregate~~as well as lower asset impairment charges in 2018. In addition, we recognized gains ~~of $8.7 million~~ from ~~the sale~~sales of businesses and customer lists within Small Business Services of $11.1 million, compared to gains recognized in the first half of 2017 of $6.8 million. These increases in earnings were partially offset by volume reductions for personal and business checks and forms due primarily to the continuing secular decline in check and forms usage, lower Deluxe Rewards revenue driven primarily by the

loss of Verizon Communications Inc. as a customer, higher restructuring costs, and continued pricing allowances within Financial Services.

Business Challenges/Market Risks

Our business, consolidated results of operations, financial condition and cash flows could be adversely affected by various risks and uncertainties. We have disclosed all known material risks in Item 1A of our ~~2016~~2017 Form 10-K, including discussion of the declining market for checks and business forms, competition, factors affecting our financial institution clients, data security risks, risks related to acquisitions, ~~and~~ the impact of economic ~~conditions.~~conditions and the ability to attract and retain key employees. All of these factors could cause our actual results to differ materially from the statements we make from time to time regarding our expected future results, including, but not limited to, forecasts regarding estimated revenue, ~~marketing solutions and other services~~MOS revenue, earnings per share, cash provided by operating activities and expected cost savings. There were no significant changes in these factors during the first ~~nine months~~half of ~~2017.~~2018.

Cost Reduction Initiatives

We anticipate that we will realize net cost reductions of approximately ~~$45.0~~$55.0 million in ~~2017,~~2018, as compared to our ~~2016~~2017 results of operations, primarily from our sales, marketing and fulfillment organizations. Approximately ~~70%~~75% of these savings are expected to impact ~~selling, general and administrative (SG&A)~~SG&A expense, with the remaining ~~30%~~25% affecting cost of revenue. Further information regarding our cost reduction initiatives can be found in the MD&A section of ~~the 2016~~our 2017 Form 10-K.

Outlook for ~~2017~~2018

We anticipate that consolidated revenue will be between ~~$1.965~~$2.045 billion and ~~$1.975~~$2.065 billion for ~~2017,~~2018, compared to $~~1.849~~1.966 billion for ~~2016.~~2017. In Small Business Services, we expect revenue to increase ~~approximately~~between 4% and 5% compared to ~~2016~~2017 revenue of $~~1.196~~1.240 billion. Volume declines in ~~core~~printed business products ~~and our strategic decision to eliminate certain low margin business~~ are expected to be more than offset by growth in our online, dealer and major accounts channels, price increases, increased revenue from our ~~marketing solutions and other services~~MOS offerings and continued ~~small-to-medium-sized~~ tuck-in acquisitions. In Financial Services, we expect revenue to increase between ~~18%~~8% and ~~19%~~9% compared to ~~2016~~2017 revenue of $~~500.0~~585.3 million. We expect increased revenue from ~~marketing solutions and other services,~~MOS, including data-driven marketing solutions and treasury management solutions, as well as ~~continued small-to-medium-sized tuck-in~~additional acquisitions. ~~Our outlook includes incremental~~In June 2018, we entered into a definitive agreement to acquire a treasury management business that we expect will deliver approximately $36.0 million of revenue ~~from~~in 2018. The regulatory conditions related to the ~~acquisitions of FMCG Direct~~acquisition have been satisfied, and ~~Data Support Systems in~~we anticipate that the ~~fourth~~acquisition will close during the third quarter of ~~2016 and RDM Corporation in the second quarter~~2018. We are also projecting revenue of ~~2017.~~approximately $21.0 million from additional acquisitions. We expect these revenue increases to be partially offset by year-over-year secular check order declines of approximately ~~5% and an~~7%, the expected loss of approximately ~~$9.0~~$11.0 million in Deluxe Rewards revenue ~~driven by~~primarily due to the loss of Verizon Communications Inc. as a customer, ~~as well as pricing adjustments. We also~~and we expect some impact

from pricing pressure in our check programs. In Direct Checks, we expect revenue to decline approximately 9%11% compared to ~~2016~~2017 revenue of $~~153.3~~140.5 million, driven primarily by secular check order volume declines resulting from reduced check usage.

We expect that ~~2017~~2018 diluted earnings per share will be between ~~$4.37~~$5.23 and ~~$4.42,~~$5.35, including charges of ~~$0.88~~$0.45 per share primarily related to restructuring, transaction and Chief Executive Officer (CEO) transition costs, as well as the asset impairment charge recorded in the first quarter of 2018. This estimate of diluted earnings per share for 2018 compares to $4.72 for 2017, which included total net charges of $0.55 per share related to ~~the~~ asset impairment charges ~~as well as~~and restructuring ~~costs~~ and transaction costs, ~~related to acquisitions. This compares to~~ ~~$4.65~~ ~~for 2016, which included total charges of $0.32 per share related to~~partially offset by a ~~loss on early debt extinguishment in~~benefit from federal tax reform under the ~~fourth quarter of 2016, as well as restructuring costs and transaction costs related to acquisitions.~~2017 Act. We expect that the benefits of additional cost reduction activities will be partially offset by the continuing secular decline in check and forms usage, ~~and~~ continued investments in ~~revenue growth opportunities, including brand awareness,~~technology and integrations, primarily in data-driven marketing, ~~solutions~~treasury management, and ~~other~~web services, ~~offers,~~as well as investments in data-driven marketing and ~~enhanced internet capabilities.~~treasury management talent, technology and process improvements to accelerate strategic sales and drive more development innovation. We also expect material costs and delivery rates to increase. We estimate that our annual effective tax rate for ~~2017~~2018 will be approximately ~~32.5%, compared to 32.6% for 2016.~~24.5%.

We believe that cash generated by operating activities, along with availability under our revolving credit facility, will be sufficient to support our operations for the next 12 months, including dividend payments, capital expenditures, required ~~debt principal and~~ interest payments, and periodic share repurchases, as well as ~~small-to-medium-sized~~likely acquisitions. As of June 30, 2018, $174.9 million was

available for borrowing under our revolving credit facility. We expect to maintain a disciplined approach to capital deployment that focuses on our need to continue investing in initiatives to drive revenue growth, including ~~small-to-medium-sized~~ acquisitions. We anticipate that our board of directors will maintain our current dividend level. However, dividends are approved by the board of directors on a quarterly basis, and thus are subject to change. ~~As of September 30, 2017, $64.6 million was available for borrowing under our revolving credit facility.~~ To the extent we generate excess cash, we plan to opportunistically repurchase common shares and/or reduce the amount outstanding under our credit ~~facility agreement.~~facility.

CONSOLIDATED RESULTS OF OPERATIONS

Consolidated Revenue


	Quarter Ended September 30,						Nine Months Ended September 30,						Quarter Ended June 30,						Six Months Ended June 30,
(in thousands, except per order amounts)	2017		2016		Change		2017		2016		Change		2018		2017		Change		2018		2017		Change
Total revenue	$	497,669	$	458,920	8.4	%	$	1,470,666	$	1,368,860	7.4	%	$	488,244	$	485,232	0.6	%	$	980,158	$	972,998	0.7	%
Orders⁽¹⁾	12,595		12,912		(2.5	%)	37,643		39,173		(3.9	%)	11,951		12,162		(1.7	%)	23,960		25,048		(4.3	%)
Revenue per order	$	39.51	$	35.54	11.2	%	$	39.07	$	34.94	11.8	%	$	40.85	$	39.90	2.4	%	$	40.91	$	38.85	5.3	%

⁽¹⁾Orders is our company-wide measure of volume and includes both products and services.

The increase in total revenue for the ~~third~~second quarter and first ~~nine months~~half of ~~2017,~~2018, as compared to the same periods in ~~2016,~~2017, was driven primarily by incremental revenue from acquired businesses of ~~approximately $51.8~~$17.2 million for the ~~third~~second quarter of ~~2017~~2018 and ~~$136.4~~$34.8 million for the first ~~nine months~~half of ~~2017,~~2018, as well as Small Business Services price ~~increases in all of our segments.~~increases. Information regarding our acquisitions can be found under the caption "Note 6: Acquisitions" ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report and under the caption "Note 5: Acquisitions" ofin the Notes to Consolidated Financial Statements appearing in ~~the 2016~~our 2017 Form 10-K. These increases in revenue were partially offset by lower order volume for both personal and business checks, as well as forms and accessories sold by Small Business Services. In addition, Financial Services Deluxe Rewards revenue ~~declined~~decreased $3.6 million for the second quarter of 2018 and $7.4 million for the first six months of 2018 due to the loss of Verizon Communications Inc. as a customer, and revenue was negatively impacted by continued pricing allowances within Financial Services.

Service revenue represented ~~25.4%~~26.2% of total revenue for the first ~~nine months~~half of ~~2017~~2018 and ~~20.3%~~24.4% for the first ~~nine months~~half of ~~2016.~~2017. As such, the majority of our revenue is generated by product sales. We do not manage our business based on product versus service revenue. Instead, we analyze our products and services based on the following categories:

Quarter Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Checks 42.4 % 46.9 % 43.9 % 47.8 %
Marketing solutions and other services 40.2 % 33.5 % 37.9 % 32.5 %
Forms 10.4 % 11.8 % 10.8 % 11.6 %
Accessories and other products 7.0 % 7.8 % 7.4 % 8.1 %
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %



	Quarter Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Checks	41.7	%	43.6	%	42.2	%	44.6	%
Marketing solutions and other services:
Small business marketing solutions	14.2	%	13.0	%	13.9	%	12.6	%
Web services	8.4	%	6.2	%	8.0	%	6.2	%
Data-driven marketing solutions	7.6	%	7.4	%	7.6	%	7.0	%
Treasury management solutions	5.9	%	6.0	%	5.9	%	5.4	%
Fraud, security, risk management and operational services	4.6	%	5.6	%	4.6	%	5.6	%
Total MOS	40.7	%	38.2	%	40.0	%	36.8	%
Forms, accessories and other products	17.6	%	18.2	%	17.8	%	18.6	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%

The number of orders decreased for the ~~third~~second quarter and first ~~nine months~~half of ~~2017,~~2018, as compared to the same periods in ~~2016,~~2017, driven by the impact of the continuing secular decline in check and forms usage, partially offset by growth in ~~marketing solutions and other services,~~MOS, including the impact of acquisitions. Revenue per order increased for the ~~third~~second quarter and first ~~nine months~~half of ~~2017,~~2018, as compared to the same periods in ~~2016,~~2017, primarily due to the benefit of Small Business Services price increases and favorable product and service mix, partially offset by the impact of ~~Financial Services~~ continued pricing ~~allowances.~~allowances in Financial Services.

Consolidated Cost of Revenue


	Quarter Ended September 30,								Nine Months Ended September 30,								Quarter Ended June 30,								Six Months Ended June 30,
(in thousands)	2017			2016			Change		2017			2016			Change		2018			2017			Change		2018			2017			Change
Total cost of revenue	$	192,917		$	166,270		16.0	%	$	551,290		$	490,407		12.4	%	$	190,201		$	179,368		6.0	%	$	378,959		$	358,682		5.7	%
Total cost of revenue as a percentage of total revenue	38.8		%	36.2		%	2.6	pts.	37.5		%	35.8		%	1.7	pts.	39.0		%	37.0		%	2.0	pts.	38.7		%	36.9		%	1.8	pts.

Cost of revenue consists primarily of raw materials used to manufacture our products, shipping and handling costs, third-party costs for outsourced products and services, payroll and related expenses, information technology costs, depreciation and amortization of assets used in the production process and in support of ~~our~~digital service offerings, and related overhead.

The increase in total cost of revenue for the ~~third~~second quarter and first ~~nine months~~half of ~~2017,~~2018, as compared to the same periods in ~~2016,~~2017, was primarily attributable to the increase in revenue, including incremental costs of acquired businesses of ~~approximately $31.4~~$7.5 million for the ~~third~~second quarter of ~~2017~~2018 and ~~$80.0~~$15.1 million for the first ~~nine months~~half of ~~2017.~~2018. In addition, delivery rates and material costs increased in ~~2017, and results for the first nine months of 2016 included a benefit of $2.1 million related to an adjustment to our environmental remediation liabilities.~~2018. Partially offsetting these increases in total cost of revenue was the impact of lower order volume for both personal and business checks, as well as forms and accessories sold by Small Business ~~Services, and favorable product mix.~~Services. In addition, total cost of revenue decreased due to manufacturing efficiencies and other benefits resulting from our continued cost reduction initiatives of approximately ~~$3.0~~$4.0 million for the ~~third~~second quarter of ~~2017~~2018 and ~~$9.0~~$6.0 million for the first ~~nine months~~half of ~~2017.~~2018. Total cost of revenue as a percentage of total revenue increased in both periods, as compared to 2017, in large part due to the increase in service revenues.

Consolidated Selling, General & Administrative Expense


	Quarter Ended September 30,								Nine Months Ended September 30,								Quarter Ended June 30,							Six Months Ended June 30,
(in thousands)	2017			2016			Change		2017			2016			Change		2018			2017			Change	2018			2017			Change
SG&A expense	$	202,999		$	198,365		2.3	%	$	628,100		$	598,563		4.9	%	$	209,585		$	208,656		0.4%	$	420,739		$	425,800		(1.2%)
SG&A expense as a percentage of total revenue	40.8		%	43.2		%	(2.4	) pts.	42.7		%	43.7		%	(1.0	) pts.	42.9		%	43.0		%	(0.1) pts.	42.9		%	43.8		%	(0.9) pts.

~~The increase in~~ SG&A expense was virtually unchanged for the ~~third~~second quarter of ~~2017,~~2018, as compared to the ~~third~~second quarter of ~~2016,~~2017. The small SG&A increase was ~~driven~~ primarily bydue to incremental costs of acquired businesses of ~~approximately $15.5~~$8.2 million, ~~as well as investments in various revenue growth opportunities, including increased spending on brand awareness initiatives, as well as an increase in performance-based compensation~~higher benefits expense driven primarily by the timing of ~~approximately $1.3~~vacations, CEO transition costs of $1.5 million and ~~increased medical costs in 2017.~~a higher average Small Business Services commission rate. These increases in SG&A expense were ~~partially~~ offset by various expense reduction initiatives of approximately ~~$9.0~~$11.5 million, primarily within our sales and marketing ~~organizations,~~organizations. Also, during the second quarter of 2018, we recognized gains from sales of a business and ~~a $1.9 million gain from the sale of businesses~~customer lists within ~~our~~ Small Business Services ~~segment.~~of $3.9 million. Further information regarding ~~the business~~these asset sales can be found ~~in the discussion of assets held for sale~~ under the caption "Note 3:

Supplemental balance sheet information" ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.

The ~~increase~~decrease in SG&A expense for the first ~~nine months~~half of ~~2017,~~2018, as compared to the first nine months of 2016, was driven primarily by incremental operating expenses of acquired businesses of approximately $49.9 million, as well as investments in various revenue growth opportunities, including higher financial institution commission rates, as well as an increase in performance-based compensation of approximately $2.5 million. In addition, Financial Services incurred legal settlement and expenses of $2.5 million in the first quarterhalf of 2017, ~~and medical costs increased in 2017. These increases were partially offset by~~was due to various expense reduction initiatives of approximately ~~$24.0~~$21.0 million, primarily within our sales and marketing organizations and ~~an $8.7~~a $2.8 million ~~gain~~decrease in medical costs. Also, during the first half of 2018, we recognized gains from ~~the sale~~sales of businesses and customer lists within ~~our~~ Small Business Services ~~segment.~~of $11.1 million, compared to gains recognized in the first half of 2017 of $6.8 million. Further information regarding ~~the business~~these asset sales can be found ~~in the discussion of assets held for sale~~ under the caption "Note 3: Supplemental balance sheet information" ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. These decreases in SG&A expense were partially offset by incremental costs of acquired businesses of $17.0 million, a higher average Small Business Services commission rate and CEO transition costs of $1.5 million.

Net Restructuring Charges


	Quarter Ended September 30,							Nine Months Ended September 30,							Quarter Ended June 30,						Six Months Ended June 30,
(in thousands)	2017		2016		Change			2017		2016		Change			2018		2017		Change		2018		2017		Change
Net restructuring charges	$	1,267	$	1,993	$	(726	)	$	3,708	$	4,007	$	(299	)	$	5,635	$	1,427	$	4,208	$	7,780	$	2,441	$	5,339

We recorded net restructuring charges related to the cost reduction initiatives discussed under Executive Overview. The net charges for each period related primarily to costs of our restructuring and integration activities such as employee severance

benefits, information technology costs, employee and equipment moves, training and travel. Further information can be found under Restructuring and CEO Transition Costs.

Asset Impairment Charges


	Quarter Ended September 30,						Nine Months Ended September 30,						Quarter Ended June 30,							Six Months Ended June 30,
(in thousands)	2017		2016		Change		2017		2016		Change		2018		2017		Change			2018		2017		Change
Asset impairment charges	$	46,630	$	—	$	46,630	$	54,880	$	—	$	54,880	$	—	$	2,954	$	(2,954	)	$	2,149	$	8,250	$	(6,101	)

During the ~~third~~first quarter of 2018, we recorded a pre-tax asset impairment charge of $2.1 million related to a Small Business Services customer list intangible asset. Based on changes in the customer base of one of our small business distributors, we concluded that the customer list asset was impaired and had a fair market value of $0 as of March 31, 2018.

During the first quarter of 2017, we recorded a pre-tax asset impairment ~~charges~~charge of $46.6 million within Small Business Services related to goodwill, the discontinued NEBS trade name and other non-current assets, primarily internal-use software. Further information regarding these charges can be found under the caption "Note 7: Fair value measurements" of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. During the nine months ended September 30, 2017, we also recorded pre-tax asset impairment charges of $8.3$5.3 million related to a small business distributor that was sold during the second quarter of 2017. ~~Further information regarding these charges~~This impairment charge reduced the carrying value of the business to its estimated fair value less costs to sell, as we negotiated the sale of the business. During the second quarter of 2017, we recorded an additional pre-tax asset impairment charge of $3.0 million as we finalized the sale of this business, resulting in a total pre-tax asset impairment charge of $8.3 million for the six months ended June 30, 2017.

Interest Expense



	Quarter Ended June 30,							Six Months Ended June 30,
(in thousands)	2018			2017			Change	2018			2017			Change
Interest expense	$	6,130		$	5,258		16.6%	$	11,708		$	10,087		16.1%
Weighted-average debt outstanding	746,875			761,546			(1.9%)	729,378			765,935			(4.8%)
Weighted-average interest rate	3.0		%	2.5		%	0.5 pts.	3.0		%	2.4		%	0.6 pts.

The increase in interest expense for the second quarter and first half of 2018, as compared to the same periods in 2017, was primarily driven by our higher weighted-average interest rate during 2018, partially offset by the lower weighted-average debt level in each period.

Income Tax Provision



	Quarter Ended June 30,							Six Months Ended June 30,
(in thousands)	2018			2017			Change	2018			2017			Change
Income tax provision	$	18,922		$	29,240		(35.3%)	$	39,003		$	53,405		(27.0%)
Effective income tax rate	23.9		%	32.9		%	(9.0) pts.	24.0		%	31.4		%	(7.4) pts.

The decrease in our effective tax rate for the second quarter and first half of 2018, as compared to the same periods in 2017, was driven in large part by the impact of federal tax reform under the 2017 Act. This legislation lowered the federal statutory tax rate 14.0 points, effective January 1, 2018. Partially offsetting this decrease in our tax rate was the elimination of the production activities deduction for 2018, favorable adjustments in 2017 related to the tax basis in a small business distributor held for sale, a lower federal benefit of state income taxes due to the lower federal tax rate, and a lower benefit from the tax effects of share-based compensation. A comparison of our effective tax rate for the first half of 2018, as compared to our annual effective tax rate for 2017, can be found ~~in the discussion of assets held for sale~~ under the caption "Note ~~3: Supplemental balance sheet information" of~~9: Income tax provision" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.

~~Interest Expense~~

Quarter Ended September 30, Nine Months Ended September 30,
(in thousands) 2017 2016 Change 2017 2016 Change
Interest expense $ 5,708
$ 4,855
17.6 % $ 15,795
$ 15,281
3.4 %
Weighted-average debt outstanding 759,084
613,244
23.8 % 763,802
618,644
23.5 %
Weighted-average interest rate 2.7 % 3.0 % (0.3 ) pts. 2.5 % 3.0 % (0.5 ) pts.

The increase in interest expense for the third quarter and first nine months of 2017, as compared to the same periods in 2016, was primarily driven by our higher weighted-average debt level during 2017, partially offset by the lower weighted-average interest rate. The reduction in our weighted-average interest rate for both periods resulted from the fourth quarter 2016 retirement of long-term notes that carried a higher interest rate.

~~Income Tax Provision~~

Quarter Ended September 30, Nine Months Ended September 30,
(in thousands) 2017 2016 Change 2017 2016 Change
Income tax provision $ 20,146
$ 29,516
(31.7 %) $ 73,551
$ 86,783
(15.2 %)
Effective income tax rate 41.2 % 33.5 % 7.7 pts. 33.6 % 33.1 % 0.5 pts.

The increase in our effective tax rate for the third quarter of 2017, as compared to the third quarter of 2016, was due primarily to the non-deductible portion of the goodwill impairment charge recorded during the quarter. The entire income tax effect of this item was reflected in our income tax provision for the third quarter of 2017 and resulted in an increase in our third quarter 2017 effective tax rate of 7.1 points. In addition, our 2017 tax rate increased due to a number of minor items.

The increase in our effective tax rate for the first nine months of 2017, as compared to the first nine months of 2016, was also due primarily to the impact of the third quarter goodwill impairment charge, which increased our effective tax rate for the first nine months of 2017 by 1.1 points. Partially offsetting this increase in our effective tax rate was the favorable impact of the asset impairment charges recorded during the first six months of 2017 related to a small business distributor that was sold during the second quarter of 2017. These impairment charges reduced the book basis of the assets relative to our tax basis in the stock of the small business distributor. In addition, tax benefits related to stock-based compensation were $3.3 million for the first nine months of 2017, compared to $1.7 million for the first nine months of 2016. We expect that our annual effective tax rate for ~~2017~~2018 will be approximately ~~32.5%~~24.5%.

RESTRUCTURING AND CEO TRANSITION COSTS

Restructuring charges – We have recorded expenses related to our restructuring activities, including accruals consisting primarily of employee severance benefits, as well as costs that are expensed when incurred, including information technology costs, employee and equipment moves, training and travel. Our restructuring activities are driven by our cost reduction and integration initiatives, ~~and include~~including employee reductions in various functional areas, as well as the closing of facilities. During 2017, we closed a retail packaging sales location, a fulfillment facility, ~~housing general office space~~ and ~~during 2016, we closed a printing facility, a call center,~~ 2 ~~warehouses and a facility housing general office space.~~ administrative facilities.

Restructuring costs have been reduced by the reversal of severance accruals when fewer employees receive severance benefits than originally estimated.

Net restructuring charges for each period were as follows:


	Quarter Ended September 30,						Nine Months Ended September 30,						Quarter Ended June 30,						Six Months Ended June 30,
(in thousands, except number of employees)	2017			2016			2017			2016			2018			2017			2018			2017
Severance accruals	$	1,248		$	1,824		$	3,596		$	3,870		$	3,804		$	1,240		$	4,648		$	2,348
Severance reversals	(78		)	(198		)	(596		)	(666		)	(95		)	(119		)	(230		)	(518		)
Operating lease obligations	—			—			23			—			—			23			—			23
Net restructuring accruals	1,170			1,626			3,023			3,204			3,709			1,144			4,418			1,853
Other costs	72			432			669			939			2,662			313			4,275			597
Net restructuring charges	$	1,242		$	2,058		$	3,692		$	4,143		$	6,371		$	1,457		$	8,693		$	2,450
Number of employees included in severance accruals	30			55			80			120			80			20			105			50

The majority of the employee reductions included in our restructuring accruals are expected to be completed ~~in 2017,~~by the end of 2018, and we expect most of the related severance payments to be paid by ~~mid-2018,~~mid-2019, utilizing cash from operations.

As a result of our employee reductions and facility closings, we expect to realize cost savings of approximately ~~$2.0~~$3.0 million in total cost of revenue and ~~$15.0~~$14.0 million in SG&A expense in ~~2017,~~2018, in comparison to our ~~2016~~2017 results of operations, which ~~represents~~represent a portion of the estimated ~~$45.0~~$55.0 million of total net cost reductions we expect to realize in ~~2017.~~2018. Expense reductions consist primarily of labor costs. Information about the other initiatives driving our cost savings can be found in the MD&A section of ~~the 2016~~our 2017 Form 10-K.

CEO transition costs – In April 2018, we announced the upcoming retirement of Mr. Lee Schram, our CEO. Mr. Schram will continue to serve as CEO during the transition process and will remain employed under the terms of a transition agreement through March 1, 2019. Under the terms of the transition agreement, if Mr. Schram remains employed through March 1, 2019, assists with the transition, and complies with certain covenants, we will provide to Mr. Schram certain benefits, including a transition bonus in the amount of $2.0 million. In addition, modifications were made to certain of his share-based payment awards. We also offered retention agreements to certain members of our management team under which each employee will be entitled to receive a cash bonus equal to his or her annual base salary or up to 1.5 times his or her annual base salary if he or she remains employed during the retention period, generally from July 1, 2018 to December 31, 2019, and complies with certain covenants. In addition, we are incurring costs related to the CEO transition process, such as executive search fees, travel and board of directors fees. CEO retirement and transition costs included within SG&A expense for the quarter and six months ended June 30, 2018, totaled $1.5 million. We estimate that CEO transition costs will total approximately $11.0 million. Expense of approximately $6.0 million is expected to be recorded in 2018 and approximately $5.0 million is expected to be recorded in 2019. Mr. Schram's transition bonus will be paid in the first quarter of 2019 and the majority of the management retention bonuses will be paid in the first quarter of 2020, utilizing cash from operations.

Further information regarding our restructuring ~~charges~~and CEO transition costs can be found under the caption “Note 8: Restructuring ~~charges” of~~and Chief Executive Officer transition costs” in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.

SEGMENT RESULTS

Additional financial information regarding our business segments appears under the caption “Note 14: Business segment information” ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.

Small Business Services

This segment's products and services are promoted through direct response mail and internet advertising; referrals from financial institutions, telecommunications clients and ~~other partners;~~others; networks of Safeguard distributors and independent dealers; a direct sales force that focuses on selling to and through major accounts; and an outbound telemarketing group. Results for this segment were as follows:


	Quarter Ended September 30,								Nine Months Ended September 30,								Quarter Ended June 30,								Six Months Ended June 30,
(in thousands)	2017			2016			Change		2017			2016			Change		2018			2017			Change		2018			2017			Change
Total revenue	$	306,408		$	298,931		2.5	%	$	917,406		$	877,384		4.6	%	$	317,742		$	302,875		4.9	%	$	634,056		$	610,998		3.8	%
Operating income	13,213			50,670			(73.9	%)	120,633			150,776			(20.0	%)	58,642			54,521			7.6	%	117,541			106,782			10.1	%
Operating margin	4.3		%	17.0		%	(12.7	) pts.	13.1		%	17.2		%	(4.1	) pts.	18.5		%	18.0		%	0.5	pts.	18.5		%	17.5		%	1.0	pts.

The increase in total revenue for the ~~third~~second quarter and first ~~nine months~~half of ~~2017,~~2018, as compared to the same periods in ~~2016,~~2017, was driven by incremental revenue from acquired businesses of approximately ~~$12.7~~$17.1 million for the ~~third~~second quarter of ~~2017~~2018 and ~~$47.7~~$29.2 million for the first ~~nine months~~half of ~~2017,~~2018, as well as the benefit of price increases. Information about our acquisitions can be found under the caption “Note 6: Acquisitions” ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report and under the caption "Note 5: Acquisitions" ofin the Notes to Consolidated Financial Statements appearing in ~~the 2016~~our 2017 Form 10-K. These increases in revenue were partially offset by lower order volume, primarily related to checks, forms and accessories, as secular check and forms usage continues to ~~decline, as well as the strategic decision to eliminate low margin business.~~decline.

The ~~decrease~~increase in operating income for the ~~third~~second quarter of ~~2017,~~2018, as compared to the ~~third~~second quarter of ~~2016,~~2017, was primarily ~~due to pre-tax~~driven by price increases, benefits of our cost reduction initiatives and a reduction in asset impairment charges of $46.6 million related to goodwill, the discontinued NEBS trade name and other non-current assets, primarily internal-use software. These charges reduced operating margin 15.2 points for the third quarter of 2017.$3.0 million. Further information regarding ~~these~~the asset impairment charges can be found under the caption "Note 7: Fair value measurements" ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. In addition, we recognized gains from sales of a business and customer lists in the second quarter of 2018 of $3.9 million. Further information regarding these asset sales can be found under the caption "Note 3: Supplemental balance sheet information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. The results of acquired businesses contributed operating income of $1.5 million for the second quarter of 2018, including acquisition-related amortization, but resulted in a 0.6 point decrease in operating margin. Partially offsetting these increases in operating income was ~~impacted by the~~ lower order volume for checks, forms and ~~accessories; investments~~accessories, driven by the continuing secular decline in ~~various revenue growth opportunities, including increased spending on brand awareness initiatives;~~check and forms usage, higher benefits expense driven primarily by the timing of vacations, and higher ~~performance-based compensation, medical costs and~~average commission, material and delivery ~~rates. Partially offsetting these decreases~~rates in 2018. In addition, restructuring charges increased $1.0 million for the second quarter of 2018, driven by our integration activities.

The increase in operating income ~~were~~for the first half of 2018, as compared to the first half of 2017, was primarily driven by price increases, ~~and~~ benefits of our cost reduction initiatives ~~as well as~~and a ~~$1.9 million gain from the sale of businesses~~reduction in 2017. The results of acquired businesses resulted in a slight increase in operating income for the third quarter of 2017, including acquisition-related amortization, but resulted in a 0.7 point decrease in operating margin for the third quarter of 2017.

~~The decrease in operating income for the first nine months of 2017, as compared to the first nine months of 2016, was primarily due to pre-tax~~ asset impairment charges of ~~$54.9~~$6.1 million related to goodwill, the discontinued NEBS trade name, a small business distributor that was sold during the second quarter of 2017, and other non-current assets, primarily internal-use software. These charges reduced operating margin 6.0 points for the first ~~nine months~~half of ~~2017.~~2018. Further information regarding ~~these~~the asset impairment charges can be found under the caption "Note 7: Fair value measurements" ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. In addition, we recognized gains from sales of businesses and customer lists in 2018 of $11.1 million, compared to gains of $6.8 million in 2017. Further information regarding these asset sales can be found under the caption "Note 3: Supplemental balance sheet information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. The results of acquired businesses contributed operating income of $2.3 million for the first half of 2018, including acquisition-related amortization, but resulted in a 0.5 point decrease in operating margin. In addition, medical costs decreased as compared to 2017. Partially offsetting these increases in operating income was ~~impacted by~~ lower order volume for checks, forms and ~~accessories; investments~~accessories, driven by the continuing secular decline in ~~various revenue growth opportunities, including~~check and forms usage, and higher ~~financial institution~~average commission, ~~rates; higher performance-based compensation, medical costs and~~ material and delivery ~~rates; and a $1.4~~rates in 2018. In addition, restructuring charges increased $1.6 million benefit in 2016 related to an adjustment to our environmental remediation liabilities. Partially offsetting these decreases in operating income were price increases and benefits of our cost reduction initiatives, as well as an $8.7 million gain from the sale of businesses in 2017. The results of acquired businesses resulted in a slight increase in operating income for the first ~~nine months~~half of ~~2017, including acquisition-related amortization, but resulted in a 1.0 point decrease in operating margin for the first nine months of 2017.~~

2018, driven by our integration activities.

Financial Services

Financial Services' products and services are sold primarily through a direct sales force, which executes product and service supply contracts with our financial institution clients, ~~nationwide,~~ including banks, credit unions and financial services companies. In the case of check supply contracts, once the financial institution relationship is established, consumers may submit their check orders through their financial institution or over the phone or internet. Results for this segment were as follows:


	Quarter Ended September 30,								Nine Months Ended September 30,								Quarter Ended June 30,							Six Months Ended June 30,
(in thousands)	2017			2016			Change		2017			2016			Change		2018			2017			Change	2018			2017			Change
Total revenue	$	157,407		$	123,033		27.9	%	$	445,946		$	374,511		19.1	%	$	139,315		$	147,745		(5.7%)	$	279,956		$	288,539		(3.0%)
Operating income	29,347			28,708			2.2	%	76,500			84,467			(9.4	%)	13,980			26,609			(47.5%)	31,954			46,854			(31.8%)
Operating margin	18.6		%	23.3		%	(4.7	) pts.	17.2		%	22.6		%	(5.4	) pts.	10.0		%	18.0		%	(8.0) pts.	11.4		%	16.2		%	(4.8) pts.

The ~~increase~~decrease in total revenue for the ~~third~~second quarter and first ~~nine months~~half of ~~2017,~~2018, as compared to the same periods in ~~2016,~~2017, was driven by ~~growth~~lower check order volume due to the continued secular decline in ~~marketing solutions and other services of approximately $38.0~~check usage. In addition, Deluxe Rewards revenue decreased $3.6 million for the ~~third~~second quarter of ~~2017~~2018 and ~~$85.8~~$7.4 million for the first ~~nine~~six months of 2017, including incremental revenue from acquired businesses of approximately $39.1 million for the third quarter of 2017 and $88.7 million for the first nine months of 2017. These increases in marketing solutions and other services revenue were partially offset by a decrease in Deluxe Rewards revenue of approximately $2.0 million for the third quarter of 2017 and $5.0 million for the first nine months of 2017 driven primarily by2018 due to the loss of Verizon Communications Inc. as a customer, ~~as well as~~and revenue was negatively impacted by continued pricing ~~adjustments. Further information about our acquisitions can be found under~~allowances. These decreases in revenue were partially offset by incremental treasury management solutions revenue of $5.6 million for the ~~caption “Note 6: Acquisitions”~~first half of 2018 from the ~~Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1~~acquisition of ~~this report and under the caption "Note 5: Acquisitions" of the Notes to Consolidated Financial Statements appearing~~RDM Corporation in the ~~2016 Form 10-K. In addition,~~second quarter of 2017 and increased revenue ~~benefited~~ from ~~price increases. Partially offsetting these revenue increases was lower check order volume due~~data-driven marketing solutions as we continue to ~~the continued decline in check usage, as well as the impact of continued pricing allowances.~~focus on growing this business.

The ~~increase~~decrease in operating income for the ~~third~~second quarter of ~~2017,~~2018, as compared to the ~~third~~second quarter of ~~2016,~~2017, was primarily due to the impact of ~~price increases~~the decline in Deluxe Rewards revenue, continued pricing allowances, lower check order volume, higher employee benefits expense driven by the timing of vacations, and ~~the benefit~~increased delivery rates in 2018. In addition, restructuring charges were $4.0 million higher than in 2017 driven by our cost reduction and integration initiatives. Partially offsetting these decreases in operating income were benefits of our continuing cost reduction initiatives. Partially offsetting these increases in operating income were lower check order volume; continued pricing allowances; the decline in Deluxe Rewards revenue; and higher performance-based compensation, medical costs and material and delivery rates. While the impact of acquired businesses was positive to operating income for the third quarter of 2017, including acquisition-related amortization, operating margin decreased 2.7 points for 2017 due to acquired businesses.

The decrease in operating income for the first ~~nine months~~half of ~~2017,~~2018, as compared to the first ~~nine months~~half of ~~2016,~~2017, was primarily due to the impact of the decline in Deluxe Rewards revenue, lower check order ~~volume;~~volume, continued pricing ~~allowances; higher performance-based compensation, medical costs~~allowances, and increased material and delivery ~~and material~~ rates in ~~2017;~~2018. In addition, restructuring charges were $4.6 million higher than in 2017 driven by our cost reduction and integration initiatives. Partially offsetting these decreases in operating income were benefits of our continuing cost reduction initiatives, lower legal costs due to legal settlement and expenses of $2.5 million in ~~the first quarter of 2017; the decline in Deluxe Rewards revenue;~~2017, and an increase of $1.4 million in transaction costs related to acquisitions. Partially offsetting these decreases in operating income were price increases and the benefit of our continuing cost reduction initiatives. While the impact of acquired businesses was positive to operating income for the first nine months of 2017, including acquisition-related amortization, operating margin decreased 2.7 points for the first nine months of 2017 due to acquired businesses.lower medical costs.

Direct Checks

Direct Checks sells products and services directly to consumers using direct marketing, including print advertising and search engine marketing and optimization strategies. Direct Checks sells under various brand names, including Checks ~~Unlimited®~~Unlimited^®, Designer ~~Checks®~~Checks^®, Checks.com^®, Check ~~Gallery®~~Gallery^®, The Styles Check ~~Company®~~Company^®, and Artistic ~~Checks®~~Checks^®, among others. Results for this segment were as follows:


	Quarter Ended September 30,								Nine Months Ended September 30,								Quarter Ended June 30,							Six Months Ended June 30,
(in thousands)	2017			2016			Change		2017			2016			Change		2018			2017			Change	2018			2017			Change
Total revenue	$	33,854		$	36,956		(8.4	%)	$	107,314		$	116,965		(8.3	%)	$	31,187		$	34,612		(9.9%)	$	66,146		$	73,461		(10.0%)
Operating income	11,296			12,914			(12.5	%)	35,555			40,640			(12.5	%)	10,201			11,697			(12.8%)	21,036			24,189			(13.0%)
Operating margin	33.4		%	34.9		%	(1.5	) pts.	33.1		%	34.7		%	(1.6	) pts.	32.7		%	33.8		%	(1.1) pts.	31.8		%	32.9		%	(1.1) pts.

The decrease in revenue for the ~~third~~second quarter and first ~~nine months~~half of ~~2017,~~2018, as compared to the same periods in ~~2016,~~2017, was primarily due to athe reduction in orders stemming from the continued secular decline in check usage. ~~For the first nine months of~~

~~2017, the volume decline was partially offset by higher revenue per order, driven by price increases and various sales initiatives.~~

The decrease in operating income for the ~~third~~second quarter ~~and first nine months~~ of ~~2017,~~2018, as compared to the ~~same periods in 2016,~~second quarter of 2017, was due primarily to the lower order volume, higher employee benefits expense driven primarily by the timing of vacations, and increased delivery ~~and material~~ costs in ~~2017.~~2018. These decreases in operating income were partially offset by benefits from our cost reduction initiatives, including lower advertising expense driven by changes in circulation intended to maximize response rates.

The decrease in operating income for the first half of 2018, as compared to the first half of 2017, was due primarily to the lower order volume and increased delivery costs in 2018. These decreases in operating income were partially offset by

benefits from our cost reduction initiatives, including lower advertising expense driven by changes in circulation intended to maximize response rates, as well as lower medical costs.

CASH FLOWS AND LIQUIDITY

As of ~~September~~June 30, ~~2017~~2018, we held cash and cash equivalents of $~~53.4~~68.6 million. The following table shows our cash flow activity for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017, and should be read in conjunction with the consolidated statements of cash flows appearing in Item 1 of this report.


	Nine Months Ended September 30,									Six Months Ended June 30,
(in thousands)	2017			2016			Change			2018			2017			Change
Net cash provided by operating activities	$	225,896		$	208,121		$	17,775		$	146,936		$	151,578		$	(4,642	)
Net cash used by investing activities	(154,102		)	(90,399		)	(63,703		)	(117,563		)	(96,102		)	(21,461		)
Net cash used by financing activities	(97,211		)	(103,050		)	5,839			(18,269		)	(98,445		)	80,176
Effect of exchange rate change on cash	2,253			2,966			(713		)	(1,750		)	1,175			(2,925		)
Net change in cash and cash equivalents	$	(23,164	)	$	17,638		$	(40,802	)	$	9,354		$	(41,794	)	$	51,148

The ~~$17.8~~$4.6 million ~~increase~~decrease in net cash provided by operating activities for the first ~~nine months~~half of ~~2017,~~2018, as compared to the first ~~nine months~~half of ~~2016,~~2017, was primarily due to the impact of the continuing secular decline in check and forms usage, as well as an increase of $2.3 million in prepaid product discount payments and a $1.9 million increase in interest payments. These decreases in operating cash generated by operations, the timing of accounts receivable collections, a $12.0 million decrease in payments for performance-based compensation, and the payment in 2016 of an incentive related to a 2013 acquisition. These increases in net cash provided by operating activitiesflow were partially offset by ~~an $18.0~~the timing of payables and a $1.9 million ~~increase~~reduction in income tax ~~payments, as well as higher contract acquisition and interest~~ payments.

Included in net cash provided by operating activities were the following operating cash outflows:


	Nine Months Ended September 30,							Six Months Ended June 30,
(in thousands)	2017		2016		Change			2018		2017		Change
Income tax payments	$	112,013	$	93,993	$	18,020		$	63,655	$	65,588	$	(1,933	)
Performance-based compensation payments⁽¹⁾	20,772		32,821		(12,049		)	21,717		20,738		979
Contract acquisition payments	20,003		17,190		2,813
Prepaid product discount payments								13,282		10,937		2,345
Interest payments	14,372		12,274		2,098			11,057		9,127		1,930
Incentive payment related to previous acquisition	—		5,434		(5,434		)
Severance payments	5,642		4,275		1,367			4,108		4,455		(347		)

⁽¹⁾Amounts reflect compensation based on total company performance.

Net cash used by investing activities for the first ~~nine months~~half of ~~2017~~2018 was ~~$63.7~~$21.5 million higher than the first ~~nine months~~half of ~~2016,~~2017, driven primarily by an increase of ~~$60.8~~$12.7 million in payments for acquisitions. Further information about our acquisitions can be found under the caption “Note 6: Acquisitions” ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. In addition, purchases of capital assets increased $5.3 million as we continue to invest in key revenue growth initiatives and order fulfillment and information technology infrastructure, and we had proceeds of $3.5 million in 2017 from ~~life insurance policies~~the redemption of marketable securities which were ~~$2.8 million lower than 2016.~~acquired as part of the acquisition of RDM Corporation in April 2017.

Net cash used by financing activities for the first ~~nine months~~half of ~~2017~~2018 was $~~5.8~~80.2 million lower than the first ~~nine months~~half of ~~2016,~~2017, due primarily to a net decrease in payments on long-term debt of ~~$13.3 million and a $1.4 million increase in cash proceeds from the exercise of stock options.~~$95.6 million. Partially offsetting ~~these decreases~~this decrease in cash used by financing activities was a ~~$5.1~~$9.9 million increase in share repurchases and a ~~$4.5 million~~$3.0 increase in ~~employee taxes paid~~payments for ~~shares withheld~~debt issuance costs related to ~~stock-based compensation activity.~~the revolving credit agreement executed in March 2018.

Significant cash ~~outflows,~~transactions, excluding those related to operating activities, for each period were as follows:


	Nine Months Ended September 30,							Six Months Ended June 30,
(in thousands)	2017		2016		Change			2018			2017			Change
Payments for acquisitions, net of cash acquired	$	125,417	$	64,637	$	60,780		$	(90,205	)	$	(77,553	)	$	(12,652	)
Payments for common shares repurchased	50,070		44,944		5,126			(39,996		)	(30,068		)	(9,928		)
Cash dividends paid to shareholders	43,672		44,127		(455		)	(28,762		)	(29,156		)	394
Purchases of capital assets	34,351		32,215		2,136			(28,040		)	(22,788		)	(5,252		)
Employee taxes paid for shares withheld	6,816		2,333		4,483			(7,947		)	(5,572		)	(2,375		)
Net change in debt	3,590		16,873		(13,283		)	56,590			(39,052		)	95,642
Proceeds from issuing shares under employee plans								5,767			5,914			(147		)

We anticipate that net cash provided by operating activities will be between ~~$340.0~~$360.0 million and ~~$345.0~~$370.0 million in 2018, compared to $338.4 million in 2017, ~~compared to $319.3 million in 2016,~~ driven by stronger ~~operating performance~~earnings, lower income tax payments and lower ~~interest payments,~~medical costs, partially offset by higher ~~income tax and medical~~interest payments. We anticipate that net cash provided by operating activities in ~~2017~~2018, along with availability under our revolving credit facility, will be utilized for dividend payments, capital expenditures of approximately ~~$45.0~~$55.0 million ~~periodic share repurchases~~ and ~~small-to-medium-sized~~interest payments, as well as likely acquisitions. We intend to focus our capital spending on key revenue growth initiatives and investments in order fulfillment and information technology infrastructure. As of ~~September~~June 30, ~~2017, $64.6~~2018, $174.9 million was available for borrowing under our revolving credit facility. To the extent we generate excess cash, we plan to opportunistically repurchase common shares and/or reduce the amount outstanding under our credit ~~facility agreement.~~facility.

As of ~~September~~June 30, ~~2017,~~2018, our foreign subsidiaries ~~located in Canada~~ held cash and cash equivalents of ~~$30.5~~$47.4 million. ~~This amount decreased $36.1 million from December 31, 2016, as we utilized Canadian cash to fund a portion of the acquisition of RDM Corporation in the second quarter of 2017.~~ Deferred income taxes have not been recognized on unremitted earnings of our foreign subsidiaries, as these amounts are intended to be reinvested indefinitely in the operations of those subsidiaries. If we were to repatriate all of ~~the Canadian~~our foreign cash and cash equivalents into the United States at one time, we estimate we would incur a ~~federal~~withholding tax liability of approximately ~~$4.0 million, based on current federal tax law.~~$2.0 million.

We believe that cash generated by operating activities, along with availability under our revolving credit facility, will be sufficient to support our operations for the next 12 months, including dividend payments, capital expenditures, ~~required debt principal and~~ interest payments, and periodic share repurchases, as well as ~~small-to-medium-sized~~likely acquisitions.

CAPITAL RESOURCES

Our total debt was ~~$756.4~~$766.8 million as of ~~September~~June 30, ~~2017~~2018, ~~a decrease~~an increase of $~~2.3~~57.5 million from December 31, ~~2016~~2017. Further information concerning our outstanding debt can be found under the caption “Note 11: Debt” ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.

Our capital structure for each period was as follows:


	September 30, 2017				December 31, 2016							June 30, 2018				December 31, 2017
(in thousands)	Amount		Weighted- average interest rate		Amount		Weighted- average interest rate		Change			Amount		Weighted- average interest rate		Amount		Weighted- average interest rate		Change
Fixed interest rate	$	1,818	2.0	%	$	1,685	2.0	%	$	133		$	1,804	2.0	%	$	1,914	2.0	%	$	(110	)
Floating interest rate	754,580		2.7	%	756,963		2.2	%	(2,383		)	765,000		3.2	%	707,386		3.0	%	57,614
Total debt	756,398		2.7	%	758,648		2.2	%	(2,250		)	766,804		3.2	%	709,300		3.0	%	57,504
Shareholders’ equity	950,545				880,970				69,575			1,075,136				1,015,013				60,123
Total capital	$	1,706,943			$	1,639,618			$	67,325		$	1,841,940			$	1,724,313			$	117,627

During the first ~~nine months~~half of ~~2017,~~2018, we repurchased a total of ~~0.7~~0.6 million shares for ~~$50.1~~$40.0 million. ~~We had~~These share repurchases were completed under an ~~outstanding~~ authorization from our board of directors ~~to purchase up to 10 million shares of our common stock. We completed the purchase of all of the remaining shares under this authorization during the first quarter of 2017. In~~in May 2016 ~~our board of directors approved an additional authorization~~ for the repurchase of up to $300.0 million of our common ~~stock, effective at the conclusion of the previous authorization.~~stock. This ~~additional~~ authorization has no expiration date, and ~~$254.7~~$199.7 million remained

available for purchase under this authorization as of ~~September~~June 30, ~~2017.~~2018. Information regarding changes in shareholders' equity can be found in the consolidated statement of shareholders' equity appearing in Item 1 of this report.

~~As of~~ ~~September 30, 2017~~,

In March 2018, we ~~had~~entered into a ~~$525.0 million~~new revolving credit facility ~~that~~in the amount of $950.0 million, subject to increase under the credit agreement to an aggregate amount not exceeding $1,425.0 million. The credit facility matures in ~~February 2019.~~March 2023. Our previous credit facility agreement was terminated contemporaneously with our entry into the new credit facility and was repaid utilizing proceeds from the new revolving credit facility. Our quarterly commitment fee ranges from ~~0.20%~~0.175% to ~~0.40%~~0.35% based on our leverage ratio. ~~During 2016, we amended the credit agreement governing our~~Our previous credit facility ~~to include~~agreement also included a ~~variable rate~~ term loan ~~facility in the aggregate amount~~facility. As of ~~$330.0 million. We borrowed the full amount during the fourth quarter of 2016 using the proceeds to retire our senior notes due in 2020 and to partially fund the acquisition of FMCG Direct in~~ December ~~2016. The term loan facility matures in February 2019 and requires periodic principal payments throughout the term of the loan. Interest is paid weekly and we may prepay~~31, 2017, $294.9 million was outstanding under the term loan ~~facility~~facility. This amount was repaid in ~~full or in part at our discretion. Amounts repaid may not be reborrowed.~~March 2018, utilizing proceeds from the new revolving credit facility.

Borrowings under our credit agreement are collateralized by substantially all of our personal and intangible property. The credit agreement governing the credit facility contains customary covenants regarding limits on levels of subsidiary indebtedness and capital expenditures, liens, investments, acquisitions, certain mergers, certain asset sales outside the ordinary course of business, and change in control as defined in the agreement. The agreement also ~~contains~~requires us to maintain certain financial ~~covenants regarding our~~ratios, including a maximum leverage ratio of 3.5 and a minimum ratio of consolidated earnings before interest ~~coverage~~ and ~~liquidity.~~taxes to consolidated interest expense, as defined in the credit agreement, of 3.0. We were in compliance with all debt covenants as of ~~September~~June 30, ~~2017~~2018, and we expect to remain in compliance with all debt covenants throughout the next 12 months.

As of ~~September~~June 30, ~~2017~~2018, amounts were available for borrowing under our revolving credit facility as follows:


(in thousands)	Total available			Total available
Revolving credit facility commitment	$	525,000		$	950,000
Amount drawn on revolving credit facility	(450,000		)	(765,000		)
Outstanding letters of credit⁽¹⁾	(10,361		)	(10,128		)
Net available for borrowing as of September 30, 2017	$	64,639
Net available for borrowing as of June 30, 2018				$	174,872

OTHER FINANCIAL POSITION INFORMATION

Information concerning items comprising selected captions on our consolidated balance sheets can be found under the caption "Note 3: Supplemental balance sheet information" ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.

Acquisitions – The impact of acquisitions on our consolidated balance sheet as of ~~September~~June 30, ~~2017~~2018 can be found under the caption “Note 6: Acquisitions” ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.

~~Contract acquisition costs~~Prepaid product discounts – Other non-current assets include ~~contract acquisition costs~~prepaid product discounts of our Financial Services segment. These costs ~~which are essentially pre-paid product discounts,~~ are recorded as non-current assets upon contract execution and are amortized, generally on the straight-line basis, as reductions of revenue over the related contract term. Changes in ~~contract acquisition costs~~prepaid product discounts during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 can be found under the caption "Note 3: Supplemental balance sheet information" ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. Cash payments for ~~contract acquisition costs~~prepaid product discounts were $~~20.0~~13.3 million for the first ~~nine months~~half of ~~2017~~2018 and ~~$17.2~~$10.9 million for the first ~~nine months~~half of ~~2016.~~2017. We anticipate cash payments of approximately ~~$26.0~~$27.0 million for the year ending December 31, ~~2017.~~2018.

The number of checks being written has been declining, which has contributed to increased competitive pressure when attempting to retain or acquire clients. Both the number of financial institution clients requesting ~~contract acquisition~~prepaid product discount payments and the amount of the payments has fluctuated from year to year. Although we anticipate that we will selectively continue to make ~~contract acquisition~~these payments, we cannot quantify future amounts with certainty. The amount paid depends on numerous factors, such as the number and timing of contract executions and renewals, competitors’ actions, overall product discount levels and the structure of up-front product discount payments versus providing higher discount levels throughout the term of the contract.

Liabilities for ~~contract acquisition payments~~prepaid product discounts are recorded upon contract execution. These obligations are monitored for each contract and are adjusted as payments are made. ~~Contract acquisition~~Prepaid product discount payments due within the next year are included in accrued liabilities in our consolidated balance sheets. These accruals were $~~13.5~~12.9 million as of ~~September~~June 30, ~~2017~~2018 and ~~$12.4~~ $11.7

million as of December 31, ~~2016~~2017. Accruals for ~~contract acquisition~~prepaid product discount payments included in other non-current liabilities in our consolidated balance sheets were ~~$24.3~~$17.4 million as of ~~September~~June 30, ~~2017~~2018 and ~~$29.9~~$21.7 million as of December 31, ~~2016~~2017.

OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND CONTRACTUAL OBLIGATIONS

It is not our general business practice to enter into off-balance sheet arrangements or to guarantee the performance of third parties. In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. These ~~indemnifications~~indemnification provisions generally encompass third-party claims arising from our products and services, including, without limitation, service failures, breach of security, intellectual property rights, governmental regulations and/or employment-related matters. Performance under these indemnities would generally be triggered by our breach of terms of the contract. In disposing of assets or businesses, we often provide representations, warranties and/or indemnities to cover various risks, including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal matters related to periods prior to disposition. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we do not believe that any liability under these indemnities would have a material adverse effect on our financial position, annual results of operations or annual cash flows. We have recorded liabilities for known indemnifications related to environmental matters. Further information regarding our environmental liabilities, as well as liabilities related to self-insurance and litigation, can be found under the caption “Note 12: Other commitments and contingencies” ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in the Item 1 of this report.

We are not engaged in any transactions, arrangements or other relationships with unconsolidated entities or other third parties that are reasonably likely to have a material effect on our liquidity or on our access to, or requirements for, capital resources. In addition, we have not established any special purpose entities nor did we enter into any material related party transactions during the first ~~nine months~~half of ~~2017~~2018 or during ~~2016.~~2017.

A table of our contractual obligations was provided in the MD&A section of ~~the 2016~~our 2017 Form 10-K. There were no significant changes in these obligations during the first ~~nine months~~half of ~~2017.~~2018, with the exception of the execution of our new revolving credit facility. Previously, amounts outstanding under our credit facility were scheduled to mature in February 2019. Under the new agreement, amounts outstanding are scheduled to mature in March 2023. As of June 30, 2018, $765.0 million was outstanding under our credit facility.

CRITICAL ACCOUNTING POLICIES

A description of our critical accounting policies was provided in the MD&A section of ~~the 2016~~our 2017 Form 10-K. There were no changes in these policies during the first ~~nine months~~half of ~~2017.~~

During the third quarter of 2017, we completed the annual impairment analysis of goodwill and our indefinite-lived trade name. In conjunction with our annual strategic planning process during the quarter, we made various changes to our internal reporting structure. As a result, we reassessed our operating segments and determined that no changes were required in our reportable operating segments. We also reassessed our previously determined reporting units and concluded that a realignment of a portion of our reporting units was required. As such, we reallocated the carrying value of goodwill to our revised reporting units based on their relative fair values. We analyzed goodwill for impairment immediately prior to this realignment by performing qualitative analyses for our Small Business Services reporting units and quantitative analyses for our Financial Services and Direct Checks reporting units. The 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 last quantitative analysis we completed. 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,2018, with the exception of our Small Business Services Safeguard reporting unit. The analysis of this reporting unit, which incorporated the results of the annual strategic planning process, indicated lowered projected long-term revenue ~~growth and profitability levels resulting from changes in market trends and the mix of products and services sold, including the continuing decline in check and forms usage.~~ recognition.

As a result, we completed impairment analyses of the long-term assets of this reporting unit, excluding goodwill, and concluded that these assets were not impaired. We then completed the quantitative analysis of the reporting unit, utilizing the income approach outlineddiscussed under the caption ~~"Note 1: Significant~~“Note 2: New accounting ~~policies"~~pronouncements” in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report, effective January 1, 2018, we implemented ASU No. 2014-09, Revenue from Contracts with Customers, and related amendments. Under the ~~2016 Form 10-K.~~new guidance, our product revenue is recognized when control of the goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods. In most cases, control is transferred when products are shipped. We recognize the vast majority of our service revenue as the services are provided. Many of our financial institution contracts require prepaid product discounts in the form of cash payments we make to our financial institution clients. These prepaid product discounts are included in other non-current assets in our consolidated balance sheets and are amortized as reductions of revenue, generally on the straight-line basis, over the contract term. Sales tax collected concurrent with revenue-producing activities is excluded from revenue. Amounts billed to customers for shipping and handling are included in revenue, while the related costs incurred for shipping and handling are reflected in cost of products and are accrued when the related revenue is recognized. As part of our Financial Services rewards, incentive and loyalty programs, we receive payments from consumers or our clients for the products and services provided, including hotel stays, gift cards and merchandise such as apparel, electronics and clothing. This ~~quantitative analysis indicated~~revenue is recorded net of the related fulfillment costs.

When a customer pays in advance for services, primarily for treasury management solutions and web hosting services, we defer the revenue and recognize it as the services are performed, generally over a period of less than 1 year. Certain of our contracts for data-driven marketing solutions and treasury management outsourcing services within Financial Services have variable consideration that ~~this reporting unit's goodwill was fully impaired and resulted in a non-cash pre-tax goodwill impairment charge~~is contingent on either the success of ~~$28.4 million during~~ the ~~quarter ended September 30, 2017. In accordance with Accounting Standards Update No. 2017-04, which we adopted on~~marketing campaign ("pay-for-performance") or the volume of outsourcing services provided. We recognize revenue for estimated variable consideration as

~~January 1, 2017,~~services are provided based on the ~~impairment charge was measured as~~the most likely amount to be realized. Revenue is recognized to the extent that it is probable that a significant reversal of revenue will not occur when the contingency is resolved. Typically, the amount ~~by which~~of consideration for these contracts is finalized within 3 months, although pricing under certain of our outsourcing contracts may be based on annual volume commitments. Revenue recognized from these contracts was approximately $100.0 million in 2017.

Certain of our contracts for treasury management solutions result from the ~~reporting unit's carrying value exceeded its estimated fair value. This impairment assessment is sensitive to changes in forecasted cash flows,~~sale of bundled arrangements that may include hardware, software and professional services, as well as ~~our selected discount rate~~customization and modification of ~~9%. Changes in~~software. Revenue for these contracts is recognized using a cost-based input method that depicts the ~~reporting unit's forecast assumptions and estimates could materially affect~~transfer of services to the ~~estimation~~customer. The transaction price is allocated to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost plus margin.

At times, a financial institution client may terminate its check supply contract with us prior to the end of the ~~fair value~~contract term. In many cases, the financial institution is contractually required to remit a contract termination payment. Such payments are recorded as revenue when the termination agreement is executed, provided that we have no further performance obligations and collection of ~~this reporting unit.~~the funds is assured. If we have further performance obligations following the execution of a contract termination agreement, we record the related revenue over the remaining service period.

~~Immediately subsequent~~Certain costs incurred to obtain contracts are required to be recognized as assets and amortized consistent with the transfer of goods or services to the ~~realignment~~customer. As such, we defer sales commissions related to obtaining check supply and treasury management solution contracts within Financial Services. These amounts are included in other non-current assets and are amortized as SG&A expense. Amortization of ~~our reporting unit structure, we completed a quantitative analysis for all~~these amounts on the straight-line basis approximates the timing of ~~our reporting units~~the transfer of goods or services to ~~which goodwill is assigned. This quantitative analysis~~the customer. Generally, these amounts are being amortized over periods of 3 to 6 years. We expense sales commissions as ~~of July 31, 2017 indicated that~~incurred when the ~~estimated fair values of our reporting units exceeded their carrying values by approximate amounts between $64.0 million and $1.4 billion,~~amortization period would have been 1 year or ~~by amounts between 36% and 314% above the carrying values of their net assets.~~less.

~~In completing~~Accounting for customer contracts can be complex and may involve the ~~annual impairment analysis~~use of various techniques to estimate total contract revenue and to allocate the transaction price to each performance obligation. Estimates related to variable consideration are based on various assumptions to project the outcome of future events. We review and update our ~~indefinite-lived trade name,~~contract-related estimates regularly, and we ~~elected~~do not anticipate that revisions to ~~perform~~our estimates would have a ~~quantitative assessment. This assessment indicated that the calculated fair value~~material effect on our results of the asset exceeded its carrying value of $19.1 million by approximately $16.0 million as of July 31, 2017. In this analysis, we assumed a discount rate of 10.0% and a royalty rate of 1.0%. A one-half percentage point increase in the discount rate would reduce the indicated fair value of the asset by approximately $2.0 million and a one-half percentage point decrease in the royalty rate would reduce the indicated fair value of the asset by approximately $17.0 million.operations, financial position or cash flows.

Information regarding other accounting pronouncements adopted during the first ~~nine months~~half of ~~2017~~2018 and those not yet adopted can be found under the caption “Note 2: New accounting pronouncements” ofin the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to changes in interest rates primarily as a result of the borrowing activities used to support our capital structure, maintain liquidity and fund business operations. We do not enter into financial instruments for speculative or trading purposes. The nature and amount of debt outstanding can be expected to vary as a result of future business requirements, market conditions and other factors. As of ~~September~~June 30, ~~2017~~2018, our total debt was comprised of the following:


(in thousands)	Carrying amount		Fair value⁽¹⁾		Weighted-average interest rate		Carrying amount		Fair value⁽¹⁾		Weighted-average interest rate
Amount drawn on revolving credit facility	$	450,000	$	450,000	2.7	%	$	765,000	$	765,000	3.2	%
Amount outstanding under term loan facility	304,580		305,250		2.7	%
Capital lease obligations	1,818		1,818		2.0	%	1,804		1,804		2.0	%
Total debt	$	756,398	$	757,068	2.7	%	$	766,804	$	766,804	3.2	%

⁽¹⁾The carrying ~~amounts~~amount reported in the consolidated balance sheets for amounts drawn under our revolving credit facility ~~and our term loan facility, excluding unamortized debt issuance costs, approximate~~approximates fair value because our interest rates are variable and reflect current market rates. Capital lease obligations are presented at their carrying amount.

Amounts drawn on our revolving credit facility ~~and our term loan facility~~ mature in ~~February 2019.~~March 2023. During the first quarter of 2018, we executed a new revolving credit facility. Further information regarding the credit facility can be found under the caption "Note 11: Debt" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. Our capital lease obligations are due through ~~June~~November 2021.

Based on the daily average amount of outstanding variable rate debt in our portfolio, a one percentage point change in our weighted-average interest rates would have resulted in a $~~5.7~~3.6 million change in interest expense for the first ~~nine months~~half of ~~2017.~~2018.

We are exposed to changes in foreign currency exchange rates. Investments in, loans and advances to foreign subsidiaries and branches, as well as the operations of these businesses, are denominated in foreign currencies, primarily ~~the~~ Canadian ~~dollar.~~and Australian dollars. The effect of exchange rate changes is not expected to have a ~~minimal~~significant impact on our earnings and cash flows, as our foreign operations represent a relatively small portion of our business. We have not entered into hedges against changes in foreign currency exchange rates.

Item 4. Controls and Procedures.

(a) Disclosure Controls and Procedures —– As of the end of the period covered by this report, ~~September~~June 30, ~~2017~~2018 (the ~~“Evaluation Date”~~"Evaluation Date"), we carried out an evaluation, under the supervision and with the participation of management,

including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the ~~“Exchange Act”~~"Exchange Act")). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

(b) Internal Control Over Financial Reporting ~~—There~~– There were no changes in our internal control over financial reporting identified in connection with our evaluation during the quarter ended ~~September~~June 30, ~~2017~~2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We record ~~provisions~~accruals with respect to identified claims or lawsuits when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable outcomes. Recorded liabilities were not material to our financial position, results of operations or liquidity, and we do not believe that any of the currently identified claims or litigation will materially affect our financial position, results of operations or liquidity upon resolution. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on our financial position, results of operations or liquidity in the period in which the ruling occurs or in future periods.

Item 1A. Risk Factors.

Our risk factors are outlined in Item 1A of our ~~Annual Report on~~2017 Form ~~10-K for the year ended December 31, 2016 (the “2016 Form 10-K”).~~10-K. There have been no significant changes to these risk factors since we filed our 2017 Form 10-K, except with regard to our credit facility. In March 2018, we executed a new credit facility that matures in March 2023. Our previous credit facility, which was terminated contemporaneously with our entry into the ~~2016 Form 10-K.~~new credit facility, would have matured in February 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table shows purchases of our own equity securities, based on trade date, that were completed during the ~~third~~second quarter of ~~2017:~~2018:

Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plans or programs Maximum approximate dollar value of shares that may yet be purchased under the plans or programs
July 1, 2017 –
July 31, 2017
—
$ —
—
$ 274,658,061
August 1, 2017 –
August 31, 2017
202,400
68.83
202,400
260,726,148
September 1, 2017 –
September 30, 2017
87,900
69.05
87,900
254,656,500
Total 290,300
68.90
290,300
254,656,500



Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum approximate dollar value of shares that may yet be purchased under the plans or programs
April 1, 2018 – April 30, 2018	—	$	—	—	$	219,730,907
May 1, 2018 – May 31, 2018	164,966	68.12		164,966	208,493,327
June 1, 2018 – June 30, 2018	130,058	67.37		130,058	199,730,908
Total	295,024	67.79		295,024	199,730,908

In August 2003, our board of directors approved an authorization to purchase up to 10 million shares of our common stock. We completed the purchase of all of the remaining shares under this authorization during February 2017. In May 2016, our board of directors approved an ~~additional~~ authorization for the repurchase of up to $300.0 million of our common ~~stock, effective at the conclusion of our previous authorization.~~stock. This ~~additional~~ authorization has no expiration date, and ~~$254.7~~$199.7 million remained available for purchase under this authorization as of ~~September~~June 30, ~~2017.~~2018.

While not considered repurchases of shares, we do at times withhold shares that would otherwise be issued under equity-based awards to cover the withholding taxes due as a result of the exercising or vesting of such awards. During the quarter ended ~~September~~June 30, ~~2017,~~2018, we withheld ~~16,431~~47,586 shares in conjunction with the vesting and exercise of equity-based awards.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.



Exhibit Number	Description	Method of Filing
3.1	Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010)	*
3.2	Bylaws (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the Commission on October 23, 2008)	*
4.1	Indenture, dated as of April 30, 2003, by and between us and Wells Fargo Bank Minnesota, N.A., as trustee (incorporated by reference to Exhibit 4.8 to the Registration Statement on Form S-3 (Registration No. 333-104858) filed with the Commission on April 30, 2003)	*



Exhibit Number	Description	Method of Filing
10.1	Credit Agreement, dated as of March 21, 2018, by and among us, the financial institutions signatory thereto and JPMorgan Chase Bank, N.A., in its capacity as administrative agent for itself and the other lenders (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on March 21, 2018)	*
10.2	Transition Agreement, dated April 25, 2018, between us and Lee J. Schram (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on April 26, 2018)	*
31.1	CEO Certification of Periodic Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	CFO Certification of Periodic Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	CEO and CFO Certification of Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, (ii) Consolidated Statements of Comprehensive Income for the quarters and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, (iii) Consolidated Statement of Shareholders' Equity for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, (iv) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, and (v) Condensed Notes to Unaudited Consolidated Financial Statements	Filed herewith

___________________

* Incorporated by reference

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	DELUXE CORPORATION (Registrant)

Date: ~~October~~July 27, ~~2017~~2018	/s/ Lee Schram
	Lee Schram Chief Executive Officer (Principal Executive Officer)

Date: ~~October~~July 27, ~~2017~~2018	/s/ Keith A. Bush
	Keith A. Bush Senior Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

4248



			Fair value measurements using
	Fair value as of measurement date		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs		Impairment charge
(in thousands)	Fair value as of measurement date		(Level 1)		(Level 2)		(Level 3)		Impairment charge
Trade name	$	—	$	—	$	—	$	—	$	14,752
Assets held for sale	3,500		—		—		3,500		8,250
Other	—		—		—		—		3,499
Total									$	26,501



(in thousands)	Nine Months Ended September 30, 2017
Balance, December 31, 2016	$	4,682
Change in fair value	1,028
Settlements	(1,249		)
Balance, September 30, 2017	$	4,461



				Fair value measurements using
	Fair value as of December 31, 2016			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(in thousands)	Fair value as of December 31, 2016			(Level 1)		(Level 2)		(Level 3)
Cash equivalents (funds held for customers)	$	6,002		$	6,002	$	—	$	—
Available-for-sale marketable securities (funds held for customers)	15,532			—		15,532		—
Long-term investments in mutual funds	1,877			1,877		—		—
Accrued contingent consideration	(4,682		)	—		—		(4,682		)



(in thousands)	Debt maturities
Remainder of 2017	$	10,313
2018	43,313
2019	701,624
Total	$	755,250