UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20192020
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☐ | 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)
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| | | | | | | | | | |
MN | 41-0216800 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3680 Victoria St. N. | Shoreview | MN | 55126-2966 |
(Address of principal executive offices) | (Zip Code) |
(651) 483-7111
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, par value $1.00 per share | DLX | NYSE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). ☒Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | ☒ | Accelerated Filer | ☐ |
Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
| | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒No
The number of shares outstanding of registrant’s common stock as of October 16, 201928, 2020 was 42,101,861.41,893,988.
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PART I – FINANCIAL INFORMATION |
Item 1. Financial Statements. | | |
Item 1. FINANCIAL STATEMENTS |
DELUXE CORPORATION
| | |
DELUXE CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited) |
(in thousands, except share par value) | | | | | | | | | | | | | | |
(in thousands, except share par value) | | September 30, 2020 | | December 31, 2019 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents, including securities carried at fair value of $35,009 and $9,713, respectively | | $ | 310,430 | | | $ | 73,620 | |
Trade accounts receivable, net of allowance for uncollectible accounts of $6,488 and $4,985, respectively | | 138,349 | | | 163,421 | |
Inventories and supplies | | 50,512 | | | 39,921 | |
Funds held for customers, including securities carried at fair value of $23,613 and $34,450, respectively | | 106,199 | | | 117,641 | |
Revenue in excess of billings | | 29,307 | | | 32,790 | |
Other current assets | | 43,139 | | | 44,818 | |
Total current assets | | 677,936 | | | 472,211 | |
Deferred income taxes | | 5,834 | | | 3,907 | |
Long-term investments | | 45,522 | | | 44,995 | |
Property, plant and equipment, net of accumulated depreciation of $365,250 and $377,180, respectively | | 80,694 | | | 96,467 | |
Operating lease assets | | 40,475 | | | 44,372 | |
Intangibles, net of accumulated amortization of $596,778 and $557,023, respectively | | 234,764 | | | 276,122 | |
Goodwill | | 736,779 | | | 804,487 | |
Other non-current assets | | 185,175 | | | 200,750 | |
Total assets | | $ | 2,007,179 | | | $ | 1,943,311 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 113,120 | | | $ | 112,198 | |
Funds held for customers | | 104,197 | | | 116,411 | |
Accrued liabilities | | 161,542 | | | 179,338 | |
Total current liabilities | | 378,859 | | | 407,947 | |
Long-term debt | | 1,040,000 | | | 883,500 | |
Operating lease liabilities | | 30,909 | | | 33,585 | |
Deferred income taxes | | 4,794 | | | 14,898 | |
Other non-current liabilities | | 41,173 | | | 32,520 | |
Commitments and contingencies (Notes 12 and 15) | | | | |
Shareholders' equity: | | | | |
Common shares $1 par value (authorized: 500,000 shares; outstanding: September 30, 2020 – 41,893; December 31, 2019 – 42,126) | | 41,893 | | | 42,126 | |
Additional paid-in capital | | 11,554 | | | 4,086 | |
Retained earnings | | 510,805 | | | 572,596 | |
Accumulated other comprehensive loss | | (52,904) | | | (47,947) | |
Non-controlling interest | | 96 | | | 0 | |
Total shareholders’ equity | | 511,444 | | | 570,861 | |
Total liabilities and shareholders’ equity | | $ | 2,007,179 | | | $ | 1,943,311 | |
(Unaudited)
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| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 73,472 |
| | $ | 59,740 |
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Trade accounts receivable, net of allowances for uncollectible accounts | | 142,845 |
| | 173,862 |
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Inventories and supplies | | 42,194 |
| | 46,441 |
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Funds held for customers | | 94,848 |
| | 100,982 |
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Revenue in excess of billings | | 25,745 |
| | 30,458 |
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Other current assets | | 46,612 |
| | 38,563 |
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Total current assets | | 425,716 |
| | 450,046 |
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Deferred income taxes | | 5,494 |
| | 2,886 |
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Long-term investments | | 44,616 |
| | 43,773 |
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Property, plant and equipment (net of accumulated depreciation of $376,165 and $367,205, respectively) | | 92,661 |
| | 90,342 |
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Operating lease assets | | 41,739 |
| | — |
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Intangibles (net of accumulated amortization of $591,450 and $535,627, respectively) | | 287,498 |
| | 359,965 |
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Goodwill | | 800,286 |
| | 1,160,626 |
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Assets held for sale | | 1,350 |
| | 1,350 |
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Other non-current assets | | 189,603 |
| | 196,108 |
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Total assets | | $ | 1,888,963 |
| | $ | 2,305,096 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
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Current liabilities: | | |
| | |
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Accounts payable | | $ | 97,588 |
| | $ | 106,978 |
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Accrued liabilities | | 264,259 |
| | 284,281 |
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Long-term debt due within one year | | — |
| | 791 |
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Total current liabilities | | 361,847 |
| | 392,050 |
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Long-term debt | | 924,000 |
| | 911,073 |
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Operating lease liabilities | | 32,434 |
| | — |
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Deferred income taxes | | 10,257 |
| | 46,680 |
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Other non-current liabilities | | 34,898 |
| | 39,880 |
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Commitments and contingencies (Notes 14 and 15) | |
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Shareholders' equity: | | |
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Common shares $1 par value (authorized: 500,000 shares; outstanding: September 30, 2019 – 42,099; December 31, 2018 – 44,647) | | 42,099 |
| | 44,647 |
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Retained earnings | | 540,612 |
| | 927,345 |
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Accumulated other comprehensive loss | | (57,184 | ) | | (56,579 | ) |
Total shareholders’ equity | | 525,527 |
| | 915,413 |
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Total liabilities and shareholders’ equity | | $ | 1,888,963 |
| | $ | 2,305,096 |
|
See Condensed Notes to Unaudited Consolidated Financial Statements
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands, except per share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Product revenue | | $ | 346,315 |
| | $ | 352,767 |
| | $ | 1,043,896 |
| | $ | 1,076,110 |
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Service revenue | | 147,278 |
| | 140,423 |
| | 442,749 |
| | 397,239 |
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Total revenue | | 493,593 |
| | 493,190 |
| | 1,486,645 |
| | 1,473,349 |
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Cost of products | | (133,807 | ) | | (132,996 | ) | | (398,869 | ) | | (400,700 | ) |
Cost of services | | (69,916 | ) | | (64,638 | ) | | (207,006 | ) | | (175,894 | ) |
Total cost of revenue | | (203,723 | ) | | (197,634 | ) | | (605,875 | ) | | (576,594 | ) |
Gross profit | | 289,870 |
| | 295,556 |
| | 880,770 |
| | 896,755 |
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Selling, general and administrative expense | | (213,318 | ) | | (208,533 | ) | | (665,787 | ) | | (629,272 | ) |
Restructuring and integration expense | | (26,255 | ) | | (5,135 | ) | | (49,089 | ) | | (12,915 | ) |
Asset impairment charges | | (390,980 | ) | | (99,170 | ) | | (390,980 | ) | | (101,319 | ) |
Operating (loss) income | | (340,683 | ) |
| (17,282 | ) | | (225,086 | ) | | 153,249 |
|
Interest expense | | (8,710 | ) | | (7,244 | ) | | (27,251 | ) | | (18,953 | ) |
Other income | | 2,183 |
| | 2,356 |
| | 6,118 |
| | 6,081 |
|
(Loss) income before income taxes | | (347,210 | ) | | (22,170 | ) | | (246,219 | ) | | 140,377 |
|
Income tax benefit (provision) | | 28,717 |
| | (8,913 | ) | | 1,498 |
| | (47,916 | ) |
Net (loss) income | | $ | (318,493 | ) | | $ | (31,083 | ) | | $ | (244,721 | ) | | $ | 92,461 |
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Comprehensive (loss) income | | $ | (322,150 | ) | | $ | (30,902 | ) | | $ | (245,326 | ) | | $ | 87,936 |
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Basic (loss) earnings per share | | (7.49 | ) | | (0.67 | ) | | (5.65 | ) | | 1.94 |
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Diluted (loss) earnings per share | | (7.49 | ) | | (0.67 | ) | | (5.65 | ) | | 1.93 |
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DELUXE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 |
Product revenue | | $ | 298,751 | | | $ | 346,315 | | | $ | 908,146 | | | $ | 1,043,896 | |
Service revenue | | 140,710 | | | 147,278 | | | 428,142 | | | 442,749 | |
Total revenue | | 439,461 | | | 493,593 | | | 1,336,288 | | | 1,486,645 | |
Cost of products | | (108,369) | | | (133,807) | | | (332,818) | | | (398,869) | |
Cost of services | | (66,092) | | | (69,916) | | | (205,974) | | | (207,006) | |
Total cost of revenue | | (174,461) | | | (203,723) | | | (538,792) | | | (605,875) | |
Gross profit | | 265,000 | | | 289,870 | | | 797,496 | | | 880,770 | |
Selling, general and administrative expense | | (198,871) | | | (213,318) | | | (634,645) | | | (665,787) | |
Restructuring and integration expense | | (18,949) | | | (26,255) | | | (56,957) | | | (49,089) | |
Asset impairment charges | | (2,760) | | | (390,980) | | | (97,973) | | | (390,980) | |
Operating income (loss) | | 44,420 | | | (340,683) | | | 7,921 | | | (225,086) | |
Interest expense | | (5,083) | | | (8,710) | | | (18,254) | | | (27,251) | |
Other income | | 2,201 | | | 2,183 | | | 8,482 | | | 6,118 | |
Income (loss) before income taxes | | 41,538 | | | (347,210) | | | (1,851) | | | (246,219) | |
Income tax (provision) benefit | | (12,094) | | | 28,717 | | | (13,958) | | | 1,498 | |
Net income (loss) | | 29,444 | | | (318,493) | | | (15,809) | | | (244,721) | |
Net income attributable to non-controlling interest | | (27) | | | 0 | | | (46) | | | 0 | |
Net income (loss) attributable to Deluxe | | $ | 29,417 | | | $ | (318,493) | | | $ | (15,855) | | | $ | (244,721) | |
Total comprehensive income (loss) | | $ | 32,319 | | | $ | (322,150) | | | $ | (20,766) | | | $ | (245,326) | |
Comprehensive income (loss) attributable to Deluxe | | 32,292 | | | (322,150) | | | (20,812) | | | (245,326) | |
Basic earnings (loss) per share | | 0.70 | | | (7.49) | | | (0.38) | | | (5.65) | |
Diluted earnings (loss) per share | | 0.70 | | | (7.49) | | | (0.40) | | | (5.65) | |
See Condensed Notes to Unaudited Consolidated Financial Statements
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | |
| | Common shares | | Common shares par value | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Total |
Balance, June 30, 2019 | | 42,928 |
| | $ | 42,928 |
| | $ | — |
| | $ | 904,748 |
| | $ | (53,527 | ) | | $ | 894,149 |
|
Net loss | | — |
| | — |
| | — |
| | (318,493 | ) | | — |
| | (318,493 | ) |
Cash dividends ($0.30 per share) | | — |
| | — |
| | — |
| | (12,977 | ) | | — |
| | (12,977 | ) |
Common shares issued | | 51 |
| | 51 |
| | 1,472 |
| | — |
| | — |
| | 1,523 |
|
Common shares repurchased | | (876 | ) | | (876 | ) | | (6,109 | ) | | (32,666 | ) | | — |
| | (39,651 | ) |
Other common shares retired | | (4 | ) | | (4 | ) | | (200 | ) | | — |
| | — |
| | (204 | ) |
Employee share-based compensation | | — |
| | — |
| | 4,837 |
| | — |
| | — |
| | 4,837 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (3,657 | ) | | (3,657 | ) |
Balance, September 30, 2019 | | 42,099 |
| | $ | 42,099 |
| | $ | — |
| | $ | 540,612 |
| | $ | (57,184 | ) | | $ | 525,527 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common shares | | Common shares par value | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Total |
Balance, December 31, 2018 | | 44,647 |
| | $ | 44,647 |
| | $ | — |
| | $ | 927,345 |
| | $ | (56,579 | ) | | $ | 915,413 |
|
Net loss | | — |
| | — |
| | — |
| | (244,721 | ) | | — |
| | (244,721 | ) |
Cash dividends ($0.90 per share) | | — |
| | — |
| | — |
| | (39,445 | ) | | — |
| | (39,445 | ) |
Common shares issued | | 150 |
| | 150 |
| | 3,411 |
| | — |
| | — |
| | 3,561 |
|
Common shares repurchased | | (2,632 | ) | | (2,632 | ) | | (13,615 | ) | | (102,300 | ) | | — |
| | (118,547 | ) |
Other common shares retired | | (66 | ) | | (66 | ) | | (3,010 | ) | | — |
| | — |
| | (3,076 | ) |
Employee share-based compensation | | — |
| | — |
| | 13,214 |
| | — |
| | — |
| | 13,214 |
|
Adoption of Accounting Standards Update No. 2016-02 (Note 2) | | — |
| | — |
| | — |
| | (267 | ) | | — |
| | (267 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (605 | ) | | (605 | ) |
Balance, September 30, 2019 | | 42,099 |
| | $ | 42,099 |
| | $ | — |
| | $ | 540,612 |
| | $ | (57,184 | ) | | $ | 525,527 |
|
| | |
DELUXE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Common shares | | Common shares par value | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Non-controlling interest | | Total |
Balance, June 30, 2020 | | 41,855 | | | $ | 41,855 | | | $ | 4,950 | | | $ | 494,243 | | | $ | (55,779) | | | $ | 69 | | | $ | 485,338 | |
Net income | | — | | | — | | | — | | | 29,417 | | | — | | | 27 | | | 29,444 | |
Cash dividends ($0.30 per share) | | — | | | — | | | — | | | (12,855) | | | — | | | — | | | (12,855) | |
Common shares issued | | 44 | | | 44 | | | 593 | | | — | | | — | | | — | | | 637 | |
Common shares retired | | (6) | | | (6) | | | (128) | | | — | | | — | | | — | | | (134) | |
Employee share-based compensation | | — | | | — | | | 6,139 | | | — | | | — | | | — | | | 6,139 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | 2,875 | | | — | | | 2,875 | |
Balance, September 30, 2020 | | 41,893 | | | $ | 41,893 | | | $ | 11,554 | | | $ | 510,805 | | | $ | (52,904) | | | $ | 96 | | | $ | 511,444 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Common shares | | Common shares par value | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Non-controlling interest | | Total |
Balance, December 31, 2019 | | 42,126 | | | $ | 42,126 | | | $ | 4,086 | | | $ | 572,596 | | | $ | (47,947) | | | $ | 0 | | | $ | 570,861 | |
Net loss | | — | | | — | | | — | | | (15,855) | | | — | | | 46 | | | (15,809) | |
Cash dividends ($0.90 per share) | | — | | | — | | | — | | | (38,562) | | | — | | | — | | | (38,562) | |
Common shares issued | | 334 | | | 334 | | | 2,860 | | | — | | | — | | | — | | | 3,194 | |
Common shares repurchased | | (499) | | | (499) | | | (9,767) | | | (3,734) | | | — | | | — | | | (14,000) | |
Other common shares retired | | (68) | | | (68) | | | (1,994) | | | — | | | — | | | — | | | (2,062) | |
Employee share-based compensation | | — | | | — | | | 16,369 | | | — | | | — | | | — | | | 16,369 | |
Adoption of Accounting Standards Update No. 2016-13 (Note 2) | | — | | | — | | | — | | | (3,640) | | | — | | | — | | | (3,640) | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (4,957) | | | — | | | (4,957) | |
Non-controlling interest, net | | — | | | — | | | — | | | — | | | — | | | 50 | | | 50 | |
Balance, September 30, 2020 | | 41,893 | | | $ | 41,893 | | | $ | 11,554 | | | $ | 510,805 | | | $ | (52,904) | | | $ | 96 | | | $ | 511,444 | |
See Condensed Notes to Unaudited Consolidated Financial Statements
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
(in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common shares | | Common shares par value | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Total |
Balance, June 30, 2018 | | 47,623 |
| | $ | 47,623 |
| | $ | — |
| | $ | 1,076,683 |
| | $ | (49,170 | ) | | $ | 1,075,136 |
|
Net loss | | — |
| | — |
| | — |
| | (31,083 | ) | | — |
| | (31,083 | ) |
Cash dividends ($0.30 per share) | | — |
| | — |
| | — |
| | (14,209 | ) | | — |
| | (14,209 | ) |
Common shares issued | | 28 |
| | 28 |
| | 1,504 |
| | — |
| | — |
| | 1,532 |
|
Common shares repurchased | | (1,346 | ) | | (1,346 | ) | | (5,246 | ) | | (73,412 | ) | | — |
| | (80,004 | ) |
Other common shares retired | | — |
| | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) |
Employee share-based compensation | | — |
| | — |
| | 3,764 |
| | — |
| | — |
| | 3,764 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 181 |
| | 181 |
|
Balance, September 30, 2018 | | 46,305 |
| | $ | 46,305 |
| | $ | — |
| | $ | 957,979 |
| | $ | (48,989 | ) | | $ | 955,295 |
|
| | |
DELUXE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued) (unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Common shares | | Common shares par value | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Total |
Balance, June 30, 2019 | | 42,928 | | | $ | 42,928 | | | $ | 0 | | | $ | 904,748 | | | $ | (53,527) | | | $ | 894,149 | |
Net loss | | — | | | — | | | — | | | (318,493) | | | — | | | (318,493) | |
Cash dividends ($0.30 per share) | | — | | | — | | | — | | | (12,977) | | | — | | | (12,977) | |
Common shares issued | | 51 | | | 51 | | | 1,472 | | | — | | | — | | | 1,523 | |
Common shares repurchased | | (876) | | | (876) | | | (6,109) | | | (32,666) | | | — | | | (39,651) | |
Other common shares retired | | (4) | | | (4) | | | (200) | | | — | | | — | | | (204) | |
Employee share-based compensation | | — | | | — | | | 4,837 | | | — | | | — | | | 4,837 | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (3,657) | | | (3,657) | |
Balance, September 30, 2019 | | 42,099 | | | $ | 42,099 | | | $ | 0 | | | $ | 540,612 | | | $ | (57,184) | | | $ | 525,527 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Common shares | | Common shares par value | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Total |
Balance, December 31, 2018 | | 44,647 | | | $ | 44,647 | | | $ | 0 | | | $ | 927,345 | | | $ | (56,579) | | | $ | 915,413 | |
Net loss | | — | | | — | | | — | | | (244,721) | | | — | | | (244,721) | |
Cash dividends ($0.90 per share) | | — | | | — | | | — | | | (39,445) | | | — | | | (39,445) | |
Common shares issued | | 150 | | | 150 | | | 3,411 | | | — | | | — | | | 3,561 | |
Common shares repurchased | | (2,632) | | | (2,632) | | | (13,615) | | | (102,300) | | | — | | | (118,547) | |
Other common shares retired | | (66) | | | (66) | | | (3,010) | | | — | | | — | | | (3,076) | |
Employee share-based compensation | | — | | | — | | | 13,214 | | | — | | | — | | | 13,214 | |
Adoption of Accounting Standards Update No. 2016-02 | | — | | | — | | | — | | | (267) | | | — | | | (267) | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (605) | | | (605) | |
Balance, September 30, 2019 | | 42,099 | | | $ | 42,099 | | | $ | 0 | | | $ | 540,612 | | | $ | (57,184) | | | $ | 525,527 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common shares | | Common shares par value | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Total |
Balance, December 31, 2017 | | 47,953 |
| | $ | 47,953 |
| | $ | — |
| | $ | 1,004,657 |
| | $ | (37,597 | ) | | $ | 1,015,013 |
|
Net income | | — |
| | — |
| | — |
| | 92,461 |
| | — |
| | 92,461 |
|
Cash dividends ($0.90 per share) | | — |
| | — |
| | — |
| | (43,012 | ) | | — |
| | (43,012 | ) |
Common shares issued | | 518 |
| | 518 |
| | 18,181 |
| | — |
| | — |
| | 18,699 |
|
Common shares repurchased | | (1,919 | ) | | (1,919 | ) | | (10,121 | ) | | (107,960 | ) | | — |
| | (120,000 | ) |
Other common shares retired | | (247 | ) | | (247 | ) | | (17,601 | ) | | — |
| | — |
| | (17,848 | ) |
Employee share-based compensation | | — |
| | — |
| | 9,541 |
| | — |
| | — |
| | 9,541 |
|
Adoption of Accounting Standards Update No. 2014-09 | | — |
| | — |
| | — |
| | 4,966 |
| | — |
| | 4,966 |
|
Adoption of Accounting Standards Update No. 2018-02 | | — |
| | — |
| | — |
| | 6,867 |
| | (6,867 | ) | | — |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (4,525 | ) | | (4,525 | ) |
Balance, September 30, 2018 | | 46,305 |
| | $ | 46,305 |
| | $ | — |
| | $ | 957,979 |
| | $ | (48,989 | ) | | $ | 955,295 |
|
See Condensed Notes to Unaudited Consolidated Financial Statements
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
| | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
Cash flows from operating activities: | | | | |
Net (loss) income | | $ | (244,721 | ) | | $ | 92,461 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
| | |
|
Depreciation | | 12,206 |
| | 12,724 |
|
Amortization of intangibles | | 83,224 |
| | 84,199 |
|
Operating lease expense | | 15,145 |
| | — |
|
Asset impairment charges | | 390,980 |
| | 101,319 |
|
Amortization of prepaid product discounts | | 17,861 |
| | 16,976 |
|
Deferred income taxes | | (38,549 | ) | | (12,157 | ) |
Employee share-based compensation expense | | 14,580 |
| | 9,481 |
|
Loss (gain) on sales of businesses and customer lists | | 224 |
| | (12,855 | ) |
Other non-cash items, net | | 9,858 |
| | 5,482 |
|
Changes in assets and liabilities, net of effect of acquisitions: | | |
| | |
|
Trade accounts receivable | | 27,505 |
| | 1,466 |
|
Inventories and supplies | | 2,728 |
| | (2,009 | ) |
Other current assets | | (3,213 | ) | | (13,030 | ) |
Non-current assets | | (3,346 | ) | | (5,116 | ) |
Accounts payable | | (10,779 | ) | | (5,453 | ) |
Prepaid product discount payments | | (20,370 | ) | | (19,125 | ) |
Other accrued and non-current liabilities | | (45,309 | ) | | (35,261 | ) |
Net cash provided by operating activities | | 208,024 |
| | 219,102 |
|
Cash flows from investing activities: | | |
| | |
|
Purchases of capital assets | | (49,679 | ) | | (42,566 | ) |
Payments for acquisitions, net of cash acquired | | (1,598 | ) | | (190,396 | ) |
Purchases of customer funds marketable securities | | (3,817 | ) | | (3,981 | ) |
Proceeds from customer funds marketable securities | | 3,817 |
| | 3,981 |
|
Other | | 1,398 |
| | 1,038 |
|
Net cash used by investing activities | | (49,879 | ) | | (231,924 | ) |
Cash flows from financing activities: | | |
| | |
|
Proceeds from issuing long-term debt | | 203,500 |
| | 1,189,500 |
|
Payments on long-term debt | | (189,500 | ) | | (1,009,139 | ) |
Net change in customer funds obligations | | (8,711 | ) | | (58 | ) |
Proceeds from issuing shares under employee plans | | 3,159 |
| | 7,300 |
|
Employee taxes paid for shares withheld | | (3,076 | ) | | (7,969 | ) |
Payments for common shares repurchased | | (118,547 | ) | | (120,000 | ) |
Cash dividends paid to shareholders | | (39,068 | ) | | (42,943 | ) |
Other | | (1,654 | ) | | (4,128 | ) |
Net cash (used) provided by financing activities | | (153,897 | ) | | 12,563 |
|
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | | 2,604 |
| | (2,446 | ) |
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | 6,852 |
| | (2,705 | ) |
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year | | 145,259 |
| | 128,819 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3) | | $ | 152,111 |
| | $ | 126,114 |
|
| | |
DELUXE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 |
Cash flows from operating activities: | | | | |
Net loss | | $ | (15,809) | | | $ | (244,721) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Depreciation | | 15,510 | | | 12,206 | |
Amortization of intangibles | | 67,555 | | | 83,224 | |
Operating lease expense | | 15,044 | | | 15,145 | |
Asset impairment charges | | 97,973 | | | 390,980 | |
Amortization of prepaid product discounts | | 21,725 | | | 17,861 | |
Deferred income taxes | | (9,395) | | | (38,549) | |
Employee share-based compensation expense | | 15,335 | | | 14,580 | |
Other non-cash items, net | | 15,231 | | | 10,082 | |
Changes in assets and liabilities: | | | | |
Trade accounts receivable | | 21,376 | | | 27,505 | |
Inventories and supplies | | (11,938) | | | 2,728 | |
Other current assets | | 2,158 | | | (3,213) | |
Non-current assets | | (13,335) | | | (3,346) | |
Accounts payable | | (9,830) | | | (10,779) | |
Prepaid product discount payments | | (24,947) | | | (20,370) | |
Other accrued and non-current liabilities | | (19,842) | | | (45,309) | |
Net cash provided by operating activities | | 166,811 | | | 208,024 | |
Cash flows from investing activities: | | | | |
Purchases of capital assets | | (42,707) | | | (49,679) | |
Proceeds from sale of facilities | | 9,713 | | | 0 | |
Purchases of customer funds marketable securities | | (3,742) | | | (3,817) | |
Proceeds from customer funds marketable securities | | 3,742 | | | 3,817 | |
Other | | 1,326 | | | 3,147 | |
Net cash used by investing activities | | (31,668) | | | (46,532) | |
Cash flows from financing activities: | | | | |
Proceeds from issuing long-term debt | | 309,000 | | | 203,500 | |
Payments on long-term debt | | (152,500) | | | (189,500) | |
Net change in customer funds obligations | | (9,375) | | | (8,711) | |
Proceeds from issuing shares under employee plans | | 3,048 | | | 3,159 | |
Employee taxes paid for shares withheld | | (2,023) | | | (3,076) | |
Payments for common shares repurchased | | (14,000) | | | (118,547) | |
Cash dividends paid to shareholders | | (38,057) | | | (39,068) | |
Other | | (2,734) | | | (5,001) | |
Net cash provided (used) by financing activities | | 93,359 | | | (157,244) | |
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | | (3,297) | | | 2,604 | |
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | 225,205 | | | 6,852 | |
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year | | 174,811 | | | 145,259 | |
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3) | | $ | 400,016 | | | $ | 152,111 | |
See Condensed Notes to Unaudited Consolidated Financial Statements
DELUXE CORPORATION6
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Note 1: Consolidated financial statements
| | |
NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS |
The consolidated balance sheet as of September 30, 2019,2020, the consolidated statements of comprehensive income (loss) income for the quarters and nine months ended September 30, 20192020 and 2018,2019, the consolidated statements of shareholders’ equity for the quarters and nine months ended September 30, 20192020 and 2018,2019 and the consolidated statements of cash flows for the nine months ended September 30, 20192020 and 20182019 are unaudited. The consolidated balance sheet as of December 31, 20182019 was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. 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, 20182019 (the “20182019 Form 10-K”)10-K).
The preparation of our consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, including the estimated impact of extraordinary events such as the novel coronavirus (COVID-19) pandemic, the results of which form the basis for making judgments about the carrying values of our assets and liabilities. Actual results may differ significantly from our estimates and assumptions, including our estimates of the severity and duration of the COVID-19 pandemic. Further information can be found in Note 15.
In November 2016, the Financial
Non-controlling interest– Effective April 1, 2020, we executed an agreement to form MedPay Exchange LLC (MPX), which delivers payments to healthcare providers from insurance companies and other payers. This entity is a variable interest entity (VIE), as defined in Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-18,Codification Topic 810, Restricted CashConsolidation. This standard requiresAs we are the statementprimary beneficiary of the VIE, we are required to consolidate MPX in our consolidated financial statements. Our partner’s interest in MPX is reported as non-controlling interest in the consolidated balance sheet within equity, separate from our equity. Net income (loss) and comprehensive income (loss) are attributed to us and the non-controlling interest on the consolidated statements of comprehensive income (loss). The amounts attributable to the non-controlling interest were not significant for the quarter or nine months ended September 30, 2020.
Comparability– Amounts on the consolidated balance sheet as of December 31, 2019 and amounts within cash flows to explain the change during the period in the total of cash, cash equivalents, restricted cashfrom operating activities and restricted cash equivalents. This standard was effective for us on January 1, 2018 and was required to be applied retrospectively. During the quarter ended December 31, 2018, we identified a misstatement in our statement of cash flows presentation under this standard. We concluded that the cash and cash equivalents included in funds held for customers should be included with cash, cash equivalents, restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows, in accordance with ASU No. 2016-18. Additionally, we determined that gross redemptions and purchases of marketable debt securities included in funds held for customers should be presented as cash flows from investing activities inon the statements of cash flows. This misstatement affected our consolidated statements of cash flows as presented in our 2018 Quarterly Reports on Form 10-Q.
We assessed the materiality of this misstatement on prior periods' financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements. We concluded that the misstatement was not material to any prior interim period and therefore, amendments of previously filed reports were not required. In accordance with ASC 250, we have corrected the misstatement for all prior periods presented by revising the consolidated financial statements appearing herein. The revisions had no impact on total assets, total liabilities, shareholders' equity, net income or net cash provided by operating activities.
The impact of the revisions on our consolidated statement of cash flows for the nine months ended September 30, 20182019 have been modified to conform to the current year presentation. On the consolidated balance sheet, assets held for sale are included within other non-current assets. In the previous year, this amount was presented separately. Within cash flows from operating activities, loss on sales of businesses and customer lists is included within other non-cash items, net. In the previous year, this amount was presented separately. Within cash flows from investing activities, payments for acquisitions, net of cash acquired, is included within the other caption. In the previous year, this amount was presented separately.
During the quarter ended September 30, 2020, we identified the incorrect presentation of certain amounts reported in the 2019 consolidated statements of cash flows. We determined that holdback payments for acquisitions and asset purchases were incorrectly included in net cash used by investing activities and should be included in net cash used by financing activities. We determined that the amounts impacting payments for acquisitions were not material to the consolidated financial statements for the nine months ended September 30, 2019, and the presentation of these amounts has been corrected in the consolidated statement of cash flows for the nine months ended September 30, 2019 appearing herein. This revision had no impact on the amount reported for cash, cash equivalents, restricted cash and restricted cash equivalents as of September 30, 2019.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
The impact of the revision on the consolidated statement of cash flows for the nine months ended September 30, 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | As previously reported | | Adjustment | | As revised |
Payments for acquisitions, net of cash acquired | | $ | (1,598) | | | $ | 1,598 | | | $ | 0 | |
Other | | 1,398 | | | 1,749 | | | 3,147 | |
Net cash used by investing activities | | (49,879) | | | 3,347 | | | (46,532) | |
Other | | (1,654) | | | (3,347) | | | (5,001) | |
Net cash used by financing activities | | (153,897) | | | (3,347) | | | (157,244) | |
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | $ | 6,852 | | | $ | 0 | | | $ | 6,852 | |
|
| | | | | | | | | | | | |
(in thousands) | | Previously reported | | Adjustment | | Revised |
Purchases of customer funds marketable securities | | $ | — |
| | $ | (3,981 | ) | | $ | (3,981 | ) |
Proceeds from customer funds marketable securities | | — |
| | 3,981 |
| | 3,981 |
|
Net cash used by investing activities | | (231,924 | ) | | — |
| | (231,924 | ) |
Net change in customer funds obligations | | — |
| | (58 | ) | | (58 | ) |
Net cash provided by financing activities | | 12,621 |
| | (58 | ) | | 12,563 |
|
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | | (1,188 | ) | | (1,258 | ) | | (2,446 | ) |
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | (1,389 | ) | | (1,316 | ) | | (2,705 | ) |
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year | | 59,240 |
| | 69,579 |
| | 128,819 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period | | $ | 57,851 |
| | $ | 68,263 |
| | $ | 126,114 |
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 2: New accounting pronouncements
| | |
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS |
ASU No. 2016-02 – In February 2016, the FASB issued ASU No. 2016-02, Leasing. This standard is intended to increase transparency and comparability among organizations by requiring the recognition of lease right-of-use 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 two amendments to this standard: ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amended narrow aspects of the guidance in ASU No. 2016-02, and ASU No. 2018-11, Targeted Improvements, which provided an optional transition method under which comparative periods presented in financial statements in the period of adoption would not be restated. In March 2019, the FASB issued ASU No. 2019-01, Codification Improvements. This standard addressed areas identified as companies prepared to implement ASU No. 2016-02. We adopted all of these standards on January 1, 2019, using a modified retrospective approach and the optional transition method under ASU No. 2018-11. As such, prior periods have not been restated to reflect the new guidance.
We elected the practical expedient package outlined in ASU No. 2016-02 under which we did not have to reassess whether an arrangement contains a lease, we carried forward our previous classification of leases as either operating or capital leases, and we did not reassess previously recorded initial direct costs. Additionally, we made the following policy elections:
we excluded leases with original terms of 12 months or less from lease assets and lease liabilities;
we separated nonlease components, such as common area maintenance charges and utilities, from the associated lease component for real estate leases, based on their estimated fair values; and
we used the accounting lease term when determining the incremental borrowing rate for leases with renewal
options.
Adoption of the standards had a material impact on our consolidated balance sheet, but did not have a significant impact on our consolidated statements of comprehensive loss or our consolidated statement of cash flows. The most significant impact was the recognition of operating lease assets of $50,803, current operating lease liabilities of $13,611 and non-current operating lease liabilities of $37,440 as of January 1, 2019. Our accounting for finance leases remained substantially unchanged.
We determine if an arrangement is a lease at inception by considering whether a contract explicitly or implicitly identifies assets deployed in the arrangement and whether we have obtained substantially all of the economic benefits from the use of the underlying assets and direct how and for what purpose the assets are used during the term of the contract. Operating leases are included in operating lease assets, accrued liabilities and operating lease liabilities on our consolidated balance sheet. Finance leases are included in property, plant and equipment, accrued liabilities and other non-current liabilities on our consolidated balance sheet.
Recently Adopted Accounting Standards
Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our lease agreements typically do not provide an implicit rate, we use our incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments.
Certain of our lease agreements include options to extend or terminate the lease. The lease term takes into account these options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is included in total cost of revenue and in selling, general and administrative (SG&A) expense on the consolidated statements of comprehensive (loss) income, and interest on finance leases is included in interest expense on the consolidated statements of comprehensive (loss) income. Operating lease expense is recognized on the straight-line basis over the lease term. Information regarding our leases can be found in Note 14.
ASU No. 2016-13 – In June 2016, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments. This 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. Subsequently, the FASB issued several amendments to this standard. In November 2018,These standards replace the FASB issued ASU No. 2018-19, Codification Improvementsincurred loss methodology previously utilized for valuing financial instruments with an expected loss methodology that is referred to Topic 326, Financial Instruments – Credit Losses, which clarifies that receivables arising from operating leases are not withinas the scopecurrent expected credit loss (CECL) methodology. The measurement of ASU No. 2016-13. In April 2019,expected losses under the FASB issued ASU No. 2019-04, Codification ImprovementsCECL methodology is applicable to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivativesfinancial instruments measured at amortized cost, including accounts and Hedging, and Topic 825, Financial Instruments. This standard provides additional guidance onnotes receivable. The standards also made targeted changes to the measurement and presentation of credit losses. In May 2019,accounting for available-for-sale debt securities. We adopted the FASB issued ASU No. 2019-05, Targeted Transition Relief, which provides transition guidance to entities that elect the fair value option for eligible instruments. All of
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
these standards are effective for us on January 1, 2020 and require adoption using athe modified retrospective approach.method for financial instruments measured at amortized cost. Under this method, prior period amounts continue to be reported in accordance with previously applicable GAAP. We dorecorded a net decrease in retained earnings of $3,640 as of January 1, 2020 for the cumulative effect of adopting the standards, which consisted primarily of an increase in the allowance for credit losses on loans and notes receivable, net of the related deferred income tax impact. We recorded no allowance for credit losses related to our available-for-sale debt securities. Further information regarding these investments can be found in Note 3.
An allowance for uncollectible accounts is a valuation account that is deducted from an asset's amortized cost basis to present the net amount expected to be collected. Amounts are charged off against the allowance when we believe the uncollectibility of an account is confirmed. In calculating the allowances related to trade accounts receivable and revenue in excess of billings, we utilize a combination of aging schedules with reserve rates applied to both current and aged receivables and roll-rate reserves using historical loss rates and changes in current or projected conditions. In determining the allowance for uncollectible accounts related to loans and notes receivable from distributors, we utilize a loss-rate analysis based on historical loss information, current delinquency rates, the credit quality of the loan recipients and the portfolio mix to determine an appropriate credit risk measurement, adjusted to reflect current loan-specific risk characteristics and changes in environmental conditions affecting our small business distributors. Changes in conditions that may affect our distributors include, but are not expectlimited to, general economic conditions, changes in the applicationmarkets for their products and services and changes in governmental regulations. In completing our analysis, we utilize a reversion methodology for periods beyond the reasonable and supportable forecast period, as many of these standards toour loans and notes receivable have a significant impactlonger terms. Further information regarding current risks and uncertainties affecting our loans and notes receivable can be found in Note 15. Further information regarding our allowances for uncollectible accounts can be found in Note 3.
Our trade accounts receivable and unbilled receivables are not interest-bearing. Interest rates on our results of operations or financial position.loans and notes receivable generally range from 6% to 8% and reflect market interest rates at the time the transactions were executed. Accrued interest included in loans and notes receivable is not significant.
ASU No. 2018-13 – In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements. This standard removes, modifies and adds certain disclosures related to recurring and nonrecurring fair value measurements. During 2018, we adopted the provisions of the standard that remove and modify disclosure requirements. The additional disclosures required under the guidance arewere effective for us on January 1, 2020 and are required to be applied prospectively to fair value measurements completed on or after the effectivethat date. Disclosures regarding our fair value measurements can be found in Note 7.
ASU No. 2018-15 – In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the new standard. The guidance is effective for usWe adopted this standard on January 1, 2020, and may be adopted retrospectively orapplying it prospectively to eligible costs incurred on or after the date the guidance is first applied. This new guidance willthis date. Adoption of this standard did impact our results of operations and financial position, as we currently expensepreviously expensed these implementation costs as incurred. We planAs of September 30, 2020, $19,617 of cloud computing implementation costs were included within other non-current assets on the consolidated balance sheet. These costs primarily relate to adoptour planned implementation of a new enterprise resource planning system.
Accounting Standards Not Yet Adopted
ASU No. 2019-12 – In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This standard prospectively. As such, the impactaddresses several specific areas of accounting for income taxes. The guidance is effective for us on January 1, 2021. Portions of the standard are required to be adopted prospectively and certain aspects will be adopted using the modified retrospective approach. We do not expect the application of this standard to have a significant impact on our results of operations or financial statements will depend on the transactions that occur subsequent to adoption.position.
Note 3: Supplemental balance sheet and cash flow information
| | |
NOTE 3: SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION |
Allowance for uncollectible
Trade accounts receivable – Changes in the allowance for uncollectible accounts included within trade accounts receivable for the nine months ended September 30, 20192020 and 20182019 were as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 |
Balance, beginning of year | | $ | 4,985 | | | $ | 3,639 | |
Bad debt expense | | 4,174 | | | 3,718 | |
Write-offs and other | | (2,671) | | | (2,537) | |
Balance, end of period | | $ | 6,488 | | | $ | 4,820 | |
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 |
Balance, beginning of year | | $ | 3,639 |
| | $ | 2,884 |
|
Bad debt expense | | 3,718 |
| | 2,275 |
|
Write-offs, net of recoveries | | (2,537 | ) | | (2,036 | ) |
Balance, end of period | | $ | 4,820 |
| | $ | 3,123 |
|
Inventories and supplies – Inventories and supplies were comprised of the following:
| | | | | | | | | | | | | | |
(in thousands) | | September 30, 2020 | | December 31, 2019 |
Raw materials | | $ | 7,025 | | | $ | 6,977 | |
Semi-finished goods | | 7,151 | | | 7,368 | |
Finished goods | | 33,144 | | | 21,982 | |
Supplies | | 3,192 | | | 3,594 | |
Inventories and supplies | | $ | 50,512 | | | $ | 39,921 | |
|
| | | | | | | | |
(in thousands) | | September 30, 2019 | | December 31, 2018 |
Raw materials | | $ | 7,537 |
| | $ | 7,543 |
|
Semi-finished goods | | 7,396 |
| | 7,273 |
|
Finished goods | | 23,719 |
| | 27,608 |
|
Supplies | | 3,542 |
| | 4,017 |
|
Inventories and supplies | | $ | 42,194 |
| | $ | 46,441 |
|
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, 2019 |
(in thousands) | | Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Funds held for customers:(1) | | | | | | | | |
Domestic money market fund | | $ | 14,000 |
| | $ | — |
| | $ | — |
| | $ | 14,000 |
|
Canadian and provincial government securities | | 8,856 |
| | — |
| | (199 | ) | | 8,657 |
|
Canadian guaranteed investment certificates | | 7,552 |
| | — |
| | — |
| | 7,552 |
|
Available-for-sale debt securities | | $ | 30,408 |
| | $ | — |
| | $ | (199 | ) | | $ | 30,209 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
(in thousands) | | Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Funds held for customers:(1) | | | | | | | | |
Domestic money market fund | | $ | 7,000 | | | $ | 0 | | | $ | 0 | | | $ | 7,000 | |
Canadian and provincial government securities | | 8,968 | | | 137 | | | 0 | | | 9,105 | |
Canadian guaranteed investment certificates | | 7,508 | | | 0 | | | 0 | | | 7,508 | |
Available-for-sale debt securities | | $ | 23,476 | | | $ | 137 | | | $ | 0 | | | $ | 23,613 | |
(1) Funds held for customers, as reported on the consolidated balance sheet as of September 30, 2019,2020, also included cash of $64,639.$82,586.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
|
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
(in thousands) | | Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Funds held for customers:(1) | | | | | | | | |
Domestic money market fund | | $ | 16,000 |
| | $ | — |
| | $ | — |
| | $ | 16,000 |
|
Canadian and provincial government securities | | 8,485 |
| | — |
| | (355 | ) | | 8,130 |
|
Canadian guaranteed investment certificates | | 7,333 |
| | — |
| | — |
| | 7,333 |
|
Available-for-sale debt securities | | $ | 31,818 |
| | $ | — |
| | $ | (355 | ) | | $ | 31,463 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(in thousands) | | Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Funds held for customers:(1) | | | | | | | | |
Domestic money market fund | | $ | 18,000 | | | $ | 0 | | | $ | 0 | | | $ | 18,000 | |
Canadian and provincial government securities | | 9,056 | | | 0 | | | (304) | | | 8,752 | |
Canadian guaranteed investment certificates | | 7,698 | | | 0 | | | 0 | | | 7,698 | |
Available-for-sale debt securities | | $ | 34,754 | | | $ | 0 | | | $ | (304) | | | $ | 34,450 | |
(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2018,2019, also included cash of $69,519.$83,191.
Expected maturities of available-for-sale debt securities as of September 30, 20192020 were as follows:
| | | | | | | | |
(in thousands) | | Fair value |
Due in one year or less | | $ | 13,057 | |
Due in two to five years | | 6,595 | |
Due in six to ten years | | 3,961 | |
Available-for-sale debt securities | | $ | 23,613 | |
|
| | | | |
(in thousands) | | Fair value |
Due in one year or less | | $ | 24,019 |
|
Due in two to five years | | 3,550 |
|
Due in six to ten years | | 2,640 |
|
Available-for-sale debt securities | | $ | 30,209 |
|
Further information regarding the fair value of available-for-sale debt securities can be found in Note 8.7.
Revenue in excess of billings – Upon adoption of ASU No. 2016-13 and related amendments on January 1, 2020 (Note 2), we recorded an allowance for uncollectible accounts related to revenue in excess of billings. This allowance was not significant upon adoption, or as of September 30, 2020. Revenue in excess of billings, net of the allowance for uncollectible accounts, was comprised of the following:
| | | | | | | | | | | | | | |
(in thousands) | | September 30, 2020 | | December 31, 2019 |
Conditional right to receive consideration | | $ | 19,611 | | | $ | 24,499 | |
Unconditional right to receive consideration | | 9,696 | | | 8,291 | |
Revenue in excess of billings | | $ | 29,307 | | | $ | 32,790 | |
|
| | | | | | | | |
(in thousands) | | September 30, 2019 | | December 31, 2018 |
Conditional right to receive consideration | | $ | 16,032 |
| | $ | 19,705 |
|
Unconditional right to receive consideration | | 9,713 |
| | 10,753 |
|
Revenue in excess of billings | | $ | 25,745 |
| | $ | 30,458 |
|
Assets held for sale – Assets held for sale as of September 30, 2019 and December 31, 2018 consisted of 1 small business customer list with a carrying value of $1,350. We are actively marketing this asset, and we expect the selling price will equal or exceed its current carrying value.
During the quarter ended September 30, 2018, we sold the assets of a provider of printed and promotional products, as well as certain small business customer lists. During the nine months ended September 30, 2018, we also sold the assets of an additional provider of printed and promotional products and a small business distributor, as well as additional small business
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
customer lists. We determined that these assets would be better positioned for long-term growth if they were managed by independent distributors. Subsequent to the sales, the assets are owned by independent distributors that are part of our Safeguard® distributor network. As such, our revenue was not impacted by these sales and the impact to our costs was not significant. These sales resulted in aggregate net gains within SG&A expense of $1,765 for the quarter ended September 30, 2018 and $12,855 for the nine months ended September 30, 2018.
Intangibles – Intangibles were comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
(in thousands) | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Amortizable intangibles: | | | | | | | | | | | | |
Internal-use software | | $ | 400,964 | | | $ | (325,746) | | | $ | 75,218 | | | $ | 380,905 | | | $ | (299,698) | | | $ | 81,207 | |
Customer lists/relationships | | 328,967 | | | (191,964) | | | 137,003 | | | 348,055 | | | (187,462) | | | 160,593 | |
Software to be sold | | 36,900 | | | (22,827) | | | 14,073 | | | 36,900 | | | (19,657) | | | 17,243 | |
Technology-based intangibles | | 34,613 | | | (26,863) | | | 7,750 | | | 34,780 | | | (22,122) | | | 12,658 | |
Trade names | | 30,098 | | | (29,378) | | | 720 | | | 32,505 | | | (28,084) | | | 4,421 | |
Intangibles | | $ | 831,542 | | | $ | (596,778) | | | $ | 234,764 | | | $ | 833,145 | | | $ | (557,023) | | | $ | 276,122 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
(in thousands) | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Amortizable intangibles: | | |
| | |
| | |
| | |
| | |
| | |
|
Internal-use software | | $ | 417,098 |
| | $ | (334,336 | ) | | $ | 82,762 |
| | $ | 388,477 |
| | $ | (308,313 | ) | | $ | 80,164 |
|
Customer lists/relationships | | 357,809 |
| | (190,993 | ) | | 166,816 |
| | 379,570 |
| | (170,973 | ) | | 208,597 |
|
Trade names | | 32,361 |
| | (27,048 | ) | | 5,313 |
| | 50,645 |
| | (26,204 | ) | | 24,441 |
|
Technology-based intangibles | | 34,080 |
| | (19,772 | ) | | 14,308 |
| | 39,300 |
| | (14,007 | ) | | 25,293 |
|
Software to be sold | | 36,900 |
| | (18,601 | ) | | 18,299 |
| | 36,900 |
| | (15,430 | ) | | 21,470 |
|
Other | | 700 |
| | (700 | ) | | — |
| | 700 |
| | (700 | ) | | — |
|
Intangibles | | $ | 878,948 |
| | $ | (591,450 | ) |
| $ | 287,498 |
|
| $ | 895,592 |
|
| $ | (535,627 | ) |
| $ | 359,965 |
|
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
During the quarternine months ended September 30, 2019,2020, we recorded asset impairment charges related to customer lists/relationships, trade names and technology-based intangibles.certain intangible assets. Further information regarding these asset impairment charges can be found in Note 8.
7.
Amortization of intangibles was $26,736 for the quarter ended September 30, 2019, $28,505$22,515 for the quarter ended September 30, 2018,2020, $26,736 for the quarter ended September 30, 2019, $67,555 for the nine months ended September 30, 2020 and $83,224 for the nine months ended September 30, 2019 and $84,199 for the nine months ended September 30, 2018.2019. Based on the intangibles in service as of September 30, 2019,2020, estimated future amortization expense is as follows:
| | | | | | | | |
(in thousands) | | Estimated amortization expense |
Remainder of 2020 | | $ | 23,996 | |
2021 | | 75,519 | |
2022 | | 51,087 | |
2023 | | 33,349 | |
2024 | | 18,185 | |
|
| | | | |
(in thousands) | | Estimated amortization expense |
Remainder of 2019 | | $ | 27,463 |
|
2020 | | 89,907 |
|
2021 | | 68,423 |
|
2022 | | 41,251 |
|
2023 | | 26,533 |
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The following intangibles were acquired during the nine months ended September 30, 2019:2020:
|
| | | | | | |
(in thousands) | | Amount | | Weighted-average amortization period (in years) |
Internal-use software | | $ | 33,370 |
| | 3 |
Customer lists/relationships(1) | | 11,970 |
| | 8 |
Acquired intangibles | | $ | 45,340 |
| | 5 |
| | | | | | | | | | | | | | |
(in thousands) | | Amount | | Weighted-average amortization period (in years) |
Internal-use software | | $ | 28,268 | | | 3 |
Customer lists/relationships | | 21,627 | | | 7 |
Acquired intangibles | | $ | 49,895 | | | 5 |
(1)
These asset purchases did not qualify as business combinations.
Goodwill – Changes in goodwill duringby reportable segment and in total for the nine months ended September 30, 20192020 were as follows:follows :
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Small Business Services | | Financial Services | | Direct Checks | | Total |
Balance, December 31, 2018: | | | | | | | | |
Goodwill, gross | | $ | 765,266 |
| | $ | 373,421 |
| | $ | 148,506 |
| | $ | 1,287,193 |
|
Accumulated impairment charges | | (126,567 | ) | | — |
| | — |
| | (126,567 | ) |
Goodwill, net of accumulated impairment charges | | 638,699 |
| | 373,421 |
|
| 148,506 |
|
| 1,160,626 |
|
Impairment charges (Note 8) | | (242,267 | ) | | (115,474 | ) | | — |
| | (357,741 | ) |
Measurement-period adjustments for prior year acquisitions (Note 6) | | (340 | ) | | (1,427 | ) | | — |
| | (1,767 | ) |
Currency translation adjustment | | (832 | ) | | — |
| | — |
| | (832 | ) |
Balance, September 30, 2019 | | $ | 395,260 |
| | $ | 256,520 |
| | $ | 148,506 |
| | $ | 800,286 |
|
| | | | | | | | |
Balance, September 30, 2019: | | |
| | |
| | |
| | |
|
Goodwill, gross | | 764,094 |
| | 371,994 |
| | 148,506 |
| | 1,284,594 |
|
Accumulated impairment charges | | (368,834 | ) | | (115,474 | ) | | — |
| | (484,308 | ) |
Goodwill, net of accumulated impairment charges | | $ | 395,260 |
| | $ | 256,520 |
|
| $ | 148,506 |
|
| $ | 800,286 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Total |
Balance, December 31, 2019: | | | | | | | | | | |
Goodwill, gross | | $ | 168,165 | | | $ | 432,984 | | | $ | 252,834 | | | $ | 434,812 | | | $ | 1,288,795 | |
Accumulated impairment charges | | 0 | | | (357,741) | | | (126,567) | | | 0 | | | (484,308) | |
Goodwill, net of accumulated impairment charges | | 168,165 | | | 75,243 | | | 126,267 | | | 434,812 | | | 804,487 | |
Impairment charges (Note 7) | | — | | | (4,317) | | | (63,356) | | | — | | | (67,673) | |
Currency translation adjustment | | — | | | — | | | (35) | | | — | | | (35) | |
Balance, September 30, 2020 | | $ | 168,165 | | | $ | 70,926 | | | $ | 62,876 | | | $ | 434,812 | | | $ | 736,779 | |
| | | | | | | | | | |
Balance, September 30, 2020: | | | | | | | | | | |
Goodwill, gross | | $ | 168,165 | | | $ | 432,984 | | | $ | 252,799 | | | $ | 434,812 | | | $ | 1,288,760 | |
Accumulated impairment charges | | 0 | | | (362,058) | | | (189,923) | | | 0 | | | (551,981) | |
Goodwill, net of accumulated impairment charges | | $ | 168,165 | | | $ | 70,926 | | | $ | 62,876 | | | $ | 434,812 | | | $ | 736,779 | |
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Other non-current assets – Other non-current assets were comprised of the following:
| | | | | | | | | | | | | | |
(in thousands) | | September 30, 2020 | | December 31, 2019 |
Postretirement benefit plan asset | | $ | 61,366 | | | $ | 56,743 | |
Prepaid product discounts | | 41,249 | | | 51,145 | |
Loans and notes receivable from Safeguard distributors, net of allowance for doubtful accounts(1) | | 38,648 | | | 66,872 | |
Cloud computing arrangements | | 19,617 | | | 0 | |
Deferred sales commissions(2) | | 10,106 | | | 9,682 | |
Other | | 14,189 | | | 16,308 | |
Other non-current assets | | $ | 185,175 | | | $ | 200,750 | |
|
| | | | | | | | |
(in thousands) | | September 30, 2019 | | December 31, 2018 |
Loans and notes receivable from Safeguard distributors | | $ | 67,924 |
| | $ | 78,693 |
|
Prepaid product discounts | | 51,748 |
| | 54,642 |
|
Postretirement benefit plan asset | | 45,808 |
| | 41,259 |
|
Deferred sales commissions(1) | | 10,603 |
| | 6,482 |
|
Deferred advertising costs | | 4,089 |
| | 5,746 |
|
Other | | 9,431 |
| | 9,286 |
|
Other non-current assets | | $ | 189,603 |
| | $ | 196,108 |
|
(1) Amount Includes the non-current portion of loans and note receivables. The current portion of these receivables is included in other current assets on the consolidated balance sheets and was $2,935 as of September 30, 2020 and $3,511 as of December 31, 2019.
(1)
(2) Amortization of deferred sales commissions was $2,756 for the nine months ended September 30, 2020 and $2,246 for the nine months ended September 30, 20192019.
Upon adoption of ASU No. 2016-13 and $2,033related amendments on January 1, 2020 (Note 2), we recorded an additional allowance for uncollectible accounts related to loans and notes receivable from Safeguard distributors. Changes in this allowance for the nine months ended September 30, 2018.2020 and 2019 were as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 |
Balance, beginning of year | | $ | 284 | | | $ | 284 | |
Adoption of ASU No. 2016-13 (Note 2) | | 4,749 | | | — | |
Bad debt expense | | 5,647 | | | 0 | |
Exchange for customer lists | | (6,402) | | | 0 | |
Balance, end of period | | $ | 4,278 | | | $ | 284 | |
DELUXE CORPORATIONBad debt expense for the nine months ended September 30, 2020, included loan-specific allowances primarily related to a distributor that was underperforming. In calculating this reserve, we utilized various valuation techniques to determine the value of the underlying collateral. During the third quarter of 2020, this note receivable was exchanged for the underlying collateral, which consisted of a customer list intangible asset. As such, the note receivable and the related allowance were reversed. Past due receivables and those on non-accrual status were not significant as of September 30, 2020.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)We categorize loans and notes receivable into risk categories based on information about the ability of borrowers to service their debt, including current financial information, historical payment experience, current economic trends and other factors. The highest quality receivables are assigned a 1-2 internal grade. Those that have a potential weakness requiring management's attention are assigned a 3-4 internal grade.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
The following table presents loans and notes receivable from Safeguard distributors, including the current portion, by credit quality indicator and by year of origination, as of September 30, 2020. There were 0 write-offs and 0 recoveries recorded during the nine months ended September 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans and notes receivable from distributors amortized cost basis by origination year | | |
(in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
Risk rating: | | | | | | | | | | | | | | |
1-2 internal grade | | $ | 1,361 | | | $ | 2,003 | | | $ | 23,843 | | | $ | 11,731 | | | $ | 216 | | | $ | 4,135 | | | $ | 43,289 | |
3-4 internal grade | | 0 | | | 2,572 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,572 | |
Loans and notes receivable | | $ | 1,361 | | | $ | 4,575 | | | $ | 23,843 | | | $ | 11,731 | | | $ | 216 | | | $ | 4,135 | | | $ | 45,861 | |
Changes in prepaid product discounts during the nine months ended September 30, 20192020 and 20182019 were as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 |
Balance, beginning of year | | $ | 51,145 | | | $ | 54,642 | |
Additions(1) | | 13,259 | | | 15,275 | |
Amortization | | (21,725) | | | (17,861) | |
Other | | (1,430) | | | (308) | |
Balance, end of period | | $ | 41,249 | | | $ | 51,748 | |
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 |
Balance, beginning of year | | $ | 54,642 |
| | $ | 63,895 |
|
Additions(1) | | 15,275 |
| | 11,695 |
|
Amortization | | (17,861 | ) | | (16,976 | ) |
Other | | (308 | ) | | (75 | ) |
Balance, end of period | | $ | 51,748 |
| | $ | 58,539 |
|
(1) Prepaid product discounts are generally accrued upon contract execution. Cash payments for prepaid product discounts were $24,947 for the nine months ended September 30, 2020 and $20,370 for the nine months ended September 30, 2019 and $19,125 for the nine months ended September 30, 2018.2019.
Accrued liabilities – Accrued liabilities were comprised of the following:
|
| | | | | | | | |
(in thousands) | | September 30, 2019 | | December 31, 2018 |
Funds held for customers | | $ | 93,337 |
| | $ | 99,818 |
|
Deferred revenue(1) | | 39,845 |
| | 54,313 |
|
Employee profit sharing/cash bonus | | 31,323 |
| | 31,286 |
|
Wages | | 13,055 |
| | 6,359 |
|
Operating lease liabilities | | 12,840 |
| | — |
|
Prepaid product discounts due within one year | | 11,221 |
| | 10,926 |
|
Customer rebates | | 9,845 |
| | 9,555 |
|
Restructuring and integration (Note 9) | | 6,138 |
| | 3,320 |
|
Other | | 46,655 |
| | 68,704 |
|
Accrued liabilities | | $ | 264,259 |
| | $ | 284,281 |
|
| | | | | | | | | | | | | | |
(in thousands) | | September 30, 2020 | | December 31, 2019 |
Deferred revenue(1) | | $ | 37,933 | | | $ | 46,098 | |
Employee cash bonuses | | 24,980 | | | 36,918 | |
Wages | | 14,261 | | | 6,937 | |
Operating lease liabilities | | 12,769 | | | 12,898 | |
Prepaid product discounts due within one year | | 6,028 | | | 14,709 | |
Other | | 65,571 | | | 61,778 | |
Accrued liabilities | | $ | 161,542 | | | $ | 179,338 | |
(1) $45,03237,411 of the December 31, 20182019 amount was recognized as revenue during the nine months ended September 30, 2019.2020.
Other non-current liabilities – Other non-current liabilities were comprised of the following:
|
| | | | | | | | |
(in thousands) | | September 30, 2019 | | December 31, 2018 |
Prepaid product discounts | | $ | 6,860 |
| | $ | 12,513 |
|
Other | | 28,038 |
| | 27,367 |
|
Other non-current liabilities | | $ | 34,898 |
| | $ | 39,880 |
|
Supplemental cash flow information – The reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents to the consolidated balance sheets was as follows:
| | | | | | | | | | | | | | |
(in thousands) | | September 30, 2020 | | September 30, 2019 |
Cash and cash equivalents | | $ | 310,430 | | | $ | 73,472 | |
Restricted cash and restricted cash equivalents included in funds held for customers | | 89,586 | | | 78,639 | |
Total cash, cash equivalents, restricted cash and restricted cash equivalents | | $ | 400,016 | | | $ | 152,111 | |
|
| | | | | | | | |
(in thousands) | | September 30, 2019 | | September 30, 2018 |
Cash and cash equivalents | | $ | 73,472 |
| | $ | 57,851 |
|
Restricted cash and restricted cash equivalents included in funds held for customers | | 78,639 |
| | 68,263 |
|
Total cash, cash equivalents, restricted cash and restricted cash equivalents | | $ | 152,111 |
| | $ | 126,114 |
|
DELUXE CORPORATION13
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 4: (Loss) earnings | | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
| | |
NOTE 4: EARNINGS (LOSS) PER SHARE |
|
|
|
|
|
|
|
|
|
The following table reflects the calculation of basic and diluted earnings (loss) earnings per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted earnings (loss) earnings per share because their effect would have been antidilutive.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 |
Earnings (loss) per share – basic: | | | | | | | | |
Net income (loss) | | $ | 29,444 | | | $ | (318,493) | | | $ | (15,809) | | | $ | (244,721) | |
Net income attributable to non-controlling interest | | (27) | | | 0 | | | (46) | | | 0 | |
Net income (loss) attributable to Deluxe | | 29,417 | | | (318,493) | | | (15,855) | | | (244,721) | |
Income allocated to participating securities | | (24) | | | (24) | | | (42) | | | (79) | |
Income (loss) attributable to Deluxe available to common shareholders | | $ | 29,393 | | | $ | (318,517) | | | $ | (15,897) | | | $ | (244,800) | |
Weighted-average shares outstanding | | 41,872 | | | 42,533 | | | 41,927 | | | 43,312 | |
Earnings (loss) per share – basic | | $ | 0.70 | | | $ | (7.49) | | | $ | (0.38) | | | $ | (5.65) | |
| | | | | | | | |
Earnings (loss) per share – diluted: | | | | | | | | |
Net income (loss) | | $ | 29,444 | | | $ | (318,493) | | | $ | (15,809) | | | $ | (244,721) | |
Net income attributable to non-controlling interest | | (27) | | | 0 | | | (46) | | | 0 | |
Net income (loss) attributable to Deluxe | | 29,417 | | | (318,493) | | | (15,855) | | | (244,721) | |
Income allocated to participating securities | | 0 | | | (24) | | | (42) | | | (79) | |
Re-measurement of share-based awards classified as liabilities | | 0 | | | 0 | | | (794) | | | 0 | |
Income (loss) attributable to Deluxe available to common shareholders | | $ | 29,417 | | | $ | (318,517) | | | $ | (16,691) | | | $ | (244,800) | |
Weighted-average shares outstanding | | 41,872 | | | 42,533 | | | 41,927 | | | 43,312 | |
Dilutive impact of potential common shares | | 119 | | | 0 | | | 40 | | | 0 | |
Weighted-average shares and potential common shares outstanding | | 41,991 | | | 42,533 | | | 41,967 | | | 43,312 | |
Earnings (loss) per share – diluted | | $ | 0.70 | | | $ | (7.49) | | | $ | (0.40) | | | $ | (5.65) | |
Antidilutive options excluded from calculation | | 2,086 | | | 1,422 | | | 2,160 | | | 1,422 | |
|
| | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 |
(Loss) earnings per share – basic: | | | | | | | | |
Net (loss) income | | $ | (318,493 | ) | | $ | (31,083 | ) | | $ | (244,721 | ) | | $ | 92,461 |
|
Income allocated to participating securities | | (24 | ) | | (53 | ) | | (79 | ) | | (396 | ) |
(Loss) income available to common shareholders | | $ | (318,517 | ) | | $ | (31,136 | ) |
| $ | (244,800 | ) | | $ | 92,065 |
|
Weighted-average shares outstanding | | 42,533 |
| | 46,781 |
| | 43,312 |
| | 47,340 |
|
(Loss) earnings per share – basic | | $ | (7.49 | ) | | $ | (0.67 | ) | | $ | (5.65 | ) | | $ | 1.94 |
|
| | | | | | | | |
(Loss) earnings per share – diluted: | | |
| | |
| | | | |
Net (loss) income | | $ | (318,493 | ) | | $ | (31,083 | ) | | $ | (244,721 | ) | | $ | 92,461 |
|
Income allocated to participating securities | | (24 | ) | | (53 | ) | | (79 | ) | | (394 | ) |
Re-measurement of share-based awards classified as liabilities | | — |
| | (98 | ) | | — |
| | (274 | ) |
(Loss) income available to common shareholders | | $ | (318,517 | ) | | $ | (31,234 | ) |
| $ | (244,800 | ) | | $ | 91,793 |
|
Weighted-average shares outstanding | | 42,533 |
| | 46,781 |
| | 43,312 |
| | 47,340 |
|
Dilutive impact of potential common shares | | — |
| | 22 |
| | — |
| | 178 |
|
Weighted-average shares and potential common shares outstanding | | 42,533 |
| | 46,803 |
|
| 43,312 |
| | 47,518 |
|
(Loss) earnings per share – diluted | | $ | (7.49 | ) | | $ | (0.67 | ) | | $ | (5.65 | ) | | $ | 1.93 |
|
Antidilutive options excluded from calculation | | 1,422 |
| | 1,037 |
| | 1,422 |
| | 570 |
|
DELUXE CORPORATION14
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 5: Other comprehensive income | | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
| | |
NOTE 5: OTHER COMPREHENSIVE INCOME (LOSS) |
Reclassification adjustments – Information regarding amounts reclassified from accumulated other comprehensive loss to net income (loss) 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 (loss) |
| | Quarter Ended September 30, | | Nine Months Ended September 30, | | |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | |
Realized (loss) gain on interest rate swap | | $ | (326) | | | $ | 81 | | | $ | (514) | | | $ | 81 | | | Interest expense |
Tax benefit (provision) | | 85 | | | (21) | | | 134 | | | (21) | | | Income tax (provision) benefit |
Realized (loss) gain on interest rate swap, net of tax | | (241) | | | 60 | | | (380) | | | 60 | | | Net income (loss) |
Amortization of postretirement benefit plan items: | | | | | | | | | | |
Prior service credit | | 355 | | | 355 | | | 1,066 | | | 1,066 | | | Other income |
Net actuarial loss | | (575) | | | (806) | | | (1,725) | | | (2,417) | | | Other income |
Total amortization | | (220) | | | (451) | | | (659) | | | (1,351) | | | Other income |
Tax benefit | | 12 | | | 70 | | | 35 | | | 209 | | | Income tax (provision) benefit |
Amortization of postretirement benefit plan items, net of tax | | (208) | | | (381) | | | (624) | | | (1,142) | | | Net income (loss) |
Total reclassifications, net of tax | | $ | (449) | | | $ | (321) | | | $ | (1,004) | | | $ | (1,082) | | | |
|
| | | | | | | | | | | | | | | | | | |
Accumulated other comprehensive loss components | | Amounts reclassified from accumulated other comprehensive loss | | Affected line item in consolidated statements of comprehensive (loss) income |
| | Quarter Ended September 30, | | Nine Months Ended September 30, | | |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | |
Realized gain on interest rate swap | | $ | 81 |
| | $ | — |
| | $ | 81 |
| | $ | — |
| | Interest expense |
Tax expense | | (21 | ) | | — |
| | (21 | ) | | — |
| | Income tax benefit (provision) |
Realized gain on interest rate swap, net of tax | | 60 |
| | — |
| | 60 |
| | — |
| | Net (loss) income |
Amortization of postretirement benefit plan items: | | | | | | | | | | |
Prior service credit | | 355 |
| | 355 |
| | 1,066 |
| | 1,066 |
| | Other income |
Net actuarial loss | | (806 | ) | | (721 | ) | | (2,417 | ) | | (2,163 | ) | | Other income |
Total amortization | | (451 | ) | | (366 | ) | | (1,351 | ) | | (1,097 | ) | | Other income |
Tax benefit | | 70 |
| | 47 |
| | 209 |
| | 447 |
| | Income tax benefit (provision) |
Amortization of postretirement benefit plan items, net of tax | | (381 | ) | | (319 | ) | | (1,142 | ) | | (650 | ) | | Net (loss) income |
Total reclassifications, net of tax | | $ | (321 | ) | | $ | (319 | ) | | $ | (1,082 | ) | | $ | (650 | ) | | |
Accumulated other comprehensive loss – Changes in the components of accumulated other comprehensive loss during the nine months ended September 30, 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Postretirement benefit plans | | Net unrealized loss on available-for-sale debt securities(1) | | Net unrealized loss on cash flow hedge(2) | | Currency translation adjustment | | Accumulated other comprehensive loss |
Balance, December 31, 2019 | | $ | (28,406) | | | $ | (275) | | | $ | (1,097) | | | $ | (18,169) | | | $ | (47,947) | |
Other comprehensive income (loss) before reclassifications | | 0 | | | 314 | | | (5,240) | | | (1,035) | | | (5,961) | |
Amounts reclassified from accumulated other comprehensive loss | | 624 | | | 0 | | | 380 | | | 0 | | | 1,004 | |
Net current-period other comprehensive income (loss) | | 624 | | | 314 | | | (4,860) | | | (1,035) | | | (4,957) | |
Balance, September 30, 2020 | | $ | (27,782) | | | $ | 39 | | | $ | (5,957) | | | $ | (19,204) | | | $ | (52,904) | |
|
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Postretirement benefit plans | | Net unrealized loss on available-for-sale debt securities(1) | | Net unrealized loss on cash flow hedge(2) | | Currency translation adjustment | | Accumulated other comprehensive loss |
Balance, December 31, 2018 | | $ | (36,529 | ) | | $ | (323 | ) | | $ | — |
| | $ | (19,727 | ) | | $ | (56,579 | ) |
Other comprehensive income (loss) before reclassifications | | — |
| | 122 |
| | (1,790 | ) | | (19 | ) | | (1,687 | ) |
Amounts reclassified from accumulated other comprehensive loss | | 1,142 |
| | — |
| | (60 | ) | | — |
| | 1,082 |
|
Net current-period other comprehensive income (loss) | | 1,142 |
| | 122 |
| | (1,850 | ) | | (19 | ) | | (605 | ) |
Balance, September 30, 2019 | | $ | (35,387 | ) | | $ | (201 | ) | | $ | (1,850 | ) | | $ | (19,746 | ) | | $ | (57,184 | ) |
(1) Other comprehensive income before reclassifications is net of income tax expense of $43.$110.
(2) Other comprehensive loss before reclassifications is net of an income tax benefit of $635.$1,840.
DELUXE CORPORATION15
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 6: Acquisitions | | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
We periodically 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 (loss) 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 (loss) income. Transaction costs were not significant to our consolidated statements of comprehensive (loss) income for the nine months ended September 30, 2019 and 2018.
We did not complete any acquisitions during the nine months ended September 30, 2019. Payments for acquisitions, net of cash acquired, for the nine months ended September 30, 2019 were $1,598 and related to holdback payments for prior year acquisitions. During the nine months ended September 30, 2018, we completed the following acquisitions within our Small Business Services segment:
In June 2018, we acquired selected assets of Velocity Servers, Inc., doing business as ColoCrossing, a data center solutions, cloud hosting and infrastructure colocation provider of dedicated hosing services.
In March 2018, we acquired all of the equity of Logomix Inc., a self-service marketing and branding platform that helps small businesses create logos and custom marketing products.
We acquired the operations of 3 small business distributors.
In August 2018, we acquired selected assets of REMITCO LLC, the remittance processing business of First Data Corporation. The results of this business are included in our Financial Services segment.
Payments for acquisitions, net of cash acquired, for the nine months ended September 30, 2018, included payments of $170,011 for these acquisitions and $20,385 for holdback payments for prior year acquisitions. Further information regarding our 2018 acquisitions can be found under the caption “Note 6: Acquisitions” in the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.
During the nine months ended September 30, 2019, we recorded measurement-period adjustments for 2018 acquisitions that decreased goodwill $1,767, with the offset to various assets and liabilities, including a $1,000 increase in customer list intangible assets.
Note 7: Derivative financial instruments | | |
NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS |
As part of our interest rate risk management strategy, in July 2019, we entered into an interest rate swap, which we designated as a cash flow hedge, to mitigate variability in interest payments on a portion of the amount drawn under our revolving credit facility (Note 13)11). The interest rate swap, which terminates in March 2023 when our revolving credit facility matures, effectively converts $200,000 of variable rate debt to a fixed rate of 1.798%. Changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive loss on the consolidated balance sheetsheets and are subsequently reclassified intoto interest expense as interest payments are made on the variable-rate debt. The fair value of the interest rate swap was $2,506$8,046 as of September 30, 2020 and $1,480 as of December 31, 2019 and was included in other non-current liabilities on the consolidated balance sheet.sheets. The fair value of this derivative is calculated based on the prevailing LIBOR rate curve on the date of measurement. The cash flow hedge was fully effective as of September 30, 2020 and December 31, 2019 and its impact on consolidated net income (loss) and our 2019consolidated statements of comprehensive loss and statement of cash flows was not significant. We also do not expect the amount to be reclassified intoto interest expense over the next 12 months to be significant.
Note 8: Fair value measurements
| | |
NOTE 7: FAIR VALUE MEASUREMENTS |
Annual asset
Goodwill impairment analyses – We evaluate the carrying value of goodwill 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 goodwill and indefinite-lived intangibles and goodwill, which is included under the caption "Note 1: Significant accounting policies"Accounting Policies" in the Notes to Consolidated Financial Statements appearing in the 20182019 Form 10-K and explains our methodology for assessing impairment of these assets.
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollarsFirst quarter 2020 goodwill impairment analyses– Effective January 1, 2020, we reorganized our reportable business segments to align with structural and management reporting changes in thousands, except per share amounts)
| |
• | 2019 annual impairment analyses– In completing the 2019 annual impairment analysis of goodwill, we elected to perform a qualitative analysis for 4 of our reporting units and a quantitative assessment for 2 of our reporting units: Financial Services Data-Driven Marketing and Small Business Services Web Services. Financial Services Data-Driven Marketing includes our businesses that provide outsourced marketing campaign targeting and execution and marketing analytics solutions. Small Business Services Web Services includes our businesses that provide hosting and domain name services, logo and web design, search engine marketing and optimization, payroll services and business incorporation and organization services.
|
support of our growth strategy (Note 14). As a result, we reassessed our previously determined reporting units and concluded that a realignment of our reporting units was required. We analyzed goodwill for impairment immediately prior to this realignment by performing a qualitative analysis for all of our reporting units, with the exception of our Direct-to-Consumer reporting unit, which is part of our new Checks reportable business segment. 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 analyses 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. The quantitative analysis of our Direct-to-Consumer reporting unit indicated that its fair value exceeded its carrying value by approximately $35,000, or 26%.
In completing the realignment of our reporting units, we reallocated the carrying value of goodwill to our new reporting units based on their relative fair values. Immediately subsequent to the realignment, we completed a quantitative analysis for the reporting units that changed as a result of the realignment. This quantitative analysis, as of July 31, 2017, whichJanuary 1, 2020, indicated that the estimated fair values of the 4our reporting units exceeded their carrying values by approximate amounts between $64,000$37,000 and $1,405,000,$954,000, or by amounts between 50%121% and 314%189% above the carrying values of their net assets.
On January 30, 2020, the World Health Organization (WHO) announced a global health emergency due to an outbreak of COVID-19 originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. Following the pandemic designation, we observed a decline in the market valuation of our common shares and we determined that the global response to the pandemic negatively impacted our estimates of expected future cash flows. After our consideration of economic, market and industry conditions, cost factors, the overall financial performance of our reporting units and the last quantitative analyses we completed, we concluded that a triggering event had occurred for 2 of our reporting units. As such, we completed quantitative goodwill impairment analyses for our Promotional Solutions and Cloud Solutions Web Hosting reporting units as of March 31, 2020. Our analyses indicated that the goodwill of our Promotional Solutions reporting unit was partially impaired and the goodwill of our Cloud Solutions Web Hosting reporting unit was fully impaired. As such, we recorded goodwill impairment charges of $63,356 and $4,317, respectively. The impairment charges were measured as the amount by which the reporting units' carrying values exceeded their estimated fair values, limited to the carrying amount of goodwill. After the impairment charges, $62,785 of goodwill remained in the Promotional Solutions reporting unit as of the measurement date.
2020 annual impairment analysis– In completing the 2020 annual impairment analysis of goodwill, we elected to perform qualitative analyses for 2 of our reporting units: Payments and Checks. These qualitative analyses evaluated factors, including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the most recent quantitative analyses we completed, which indicated that the estimated
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
fair values of these reporting units exceeded their carrying values by approximately $490,000 and $955,000, or by 189% and 180% above the carrying values of their net assets. In completing these assessments, we noted no changes in events or circumstance that indicated that it was more likely than not that the fair value of anyeither reporting unit was less than its carrying amount.
TheWe elected to perform quantitative analyses as of July 31, 2019for our other 2 reporting units: Cloud Data Analytics and Promotional Solutions. These quantitative analyses indicated that the goodwillestimated fair values of our Financial Services Data-Driven Marketingthese reporting unit was partially impairedunits exceeded their carrying values by approximately $100,000 and $210,000, or by 63% and 132% above the goodwillcarrying values of our Small Business Services Web Services reporting unit was fully impaired.their net assets. As such, we recorded pretax0 goodwill impairment charges were recorded as a result of $115,474 and $242,267, respectively. Bothour annual impairment charges resulted from a combination of triggering events and circumstances, including underperformance against 2019 expectations and the original acquisition business case assumptions, our decision in the third quarter of 2019 to exit certain customer contracts, the loss of certain large customers in the third quarter of 2019 as they elected to in-source some of the services we provide, and the sustained decline in our stock price. The impairment charges were measured as the amount by which the reporting units' carrying values exceeded their estimated fair values, limited to the carrying amount of goodwill. After the impairment charges, $70,914 of goodwill remained in the Financial Services Data-Driven Marketing reporting unit.analysis.
| |
• | 2018 annual impairment analyses– Details of our 2018 annual impairment analyses can be found under the caption "Note 8: Fair value measurements" in the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K. These analyses indicated that the goodwill of the Small Business Services Indirect reporting unit was fully impaired, resulting in a pretax goodwill impairment charge of $78,188 during the quarter ended September 30, 2018. In addition, the assets of this reporting unit included an indefinite-lived trade name intangible asset. Our quantitative analysis of this asset indicated that it was also fully impaired (level 3 fair value measurement), resulting in a pretax asset impairment charge of $19,100.
|
Other non-recurringnonrecurring asset impairment analyses –Due to certain triggering events, we assessed for impairment the other long-lived assets of our Financial Services Data-Driven Marketing and Small Business Services Web Services reporting units as of July 31, 2019. As a result of the same factors that resulted inimpacts of the goodwillCOVID-19 pandemic, we assessed for impairment charge,certain long-lived assets of our Cloud Solutions Web Hosting reporting unit as of March 31, 2020. As a result of these assessments, we recorded pretax asset impairment charges of $31,316$17,678 related to certain customer list, software and trade name customer list and technology-based intangible assets inassets. With the Small Business Services Web Services reporting unit. We concluded that the long-livedexception of certain internal-use software assets, of our Financial Services Data-Driven Marketing reporting unit were not impaired. During the quarter ended September 30, 2019, we also recorded a pretax asset impairment charge of $1,923 related to an additional Financial Services customer list intangible asset. Due to a change in the related forecasted cash flows associated with the asset, we determined that it wasthe assets were fully impaired as of July 31, 2019.impaired. We utilized the discounted value of estimated future cash flows to estimate the fair valuesvalue of thesethe asset groups (level 3group. In our analysis, we assumed a revenue decline of 31% and a gross margin decline of 5.2 points in 2020, as well as a discount rate of 9%.
During the first quarter of 2020, we assessed for impairment the carrying value of an asset group related to a small business distributor that we previously purchased. Our assessment was the result of customer attrition during the quarter that impacted our projections of future cash flows. Based on our estimate of discounted future cash flows, we determined that the asset group was partially impaired as of February 29, 2020, and we recorded an asset impairment charge of $2,752, reducing the carrying value of the related customer list intangible asset. During the third quarter of 2020, as customer attrition continued, we again assessed this asset group for impairment and recorded an additional asset impairment charge of $2,356, bringing the total impairment charge to $5,108 in 2020. In calculating the estimated fair value measurements)of the asset group as of September 30, 2020, we assumed 0 revenue growth, a 1.0 point improvement in gross margin and a discount rate of 11%.
DuringAlso during the first nine months of 2020, we recorded asset impairment charges of $7,514 related primarily to the rationalization of our real estate footprint, as well as internal-use software held for sale as of December 31, 2019. These assets were written down to their estimated fair values less costs to sell and the sale of the related real estate assets was completed during the quarter ended September 30, 2018, we recorded pretax asset impairment charges of $1,882 for Financial Services customer list intangible assets related to 2 small distributors we acquired in 2015. Based on higher than anticipated customer attrition, we determined that the customer lists were partially impaired as of July 31, 2018. During the quarter ended March 31, 2018, we recorded a pretax 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 fully impaired as of March 31, 2018. We utilized the discounted value of estimated future cash flows to estimate the fair values of these asset groups (Level 3 fair value measurements).2020.
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Information regarding theAsset impairment analyses completed during each year was as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair value measurements using | | |
| | Fair value as of measurement date | | Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs | | Impairment charge |
(in thousands) | | | (Level 1) | | (Level 2) | | (Level 3) | |
2019 analyses: | | | | | | | | | | |
Trade names (Small Business Services) | | $ | 1,834 |
| | $ | — |
| | $ | — |
| | $ | 1,834 |
| | $ | 14,441 |
|
Customer lists (Small Business Services) | | 4,405 |
| | — |
| | — |
| | 4,405 |
| | 11,655 |
|
Technology-based (Small Business Services) | | — |
| | — |
| | — |
| | — |
| | 5,220 |
|
Customer list (Financial Services) | | — |
| | — |
| | — |
| | — |
| | 1,923 |
|
Goodwill | | | | | | | | | | 357,741 |
|
Total impairment charges | | | | | | | | | | $ | 390,980 |
|
2018 analyses: | | | | | | | | | | |
Indefinite-lived trade name (Small Business Services) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 19,100 |
|
Customer list (Small Business Services) | | — |
| | $ | — |
| | — |
| | — |
| | 2,149 |
|
Customer lists (Financial Services)(1) | | 4,223 |
| | — |
| | — |
| | 4,223 |
| | 1,882 |
|
Goodwill | | | | | | | | | | 78,188 |
|
Total impairment charges | | | | | | | | | | $ | 101,319 |
|
(1) The fair value presented is for the entire asset group that includes the impaired customer lists.
Recurring fair value measurements – The fair value of accrued contingent consideration is remeasured each reporting period. Increases or decreases in projected revenue 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 on the consolidated statements of comprehensive (loss) income. Changes in fair value resulting from accretion for the passage of time are included in interest expense on the consolidated statements of comprehensive (loss) income.
Changes in accrued contingent consideration during the nine months ended September 30, 20192020 were 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) | |
Cloud Solutions Web Hosting assets: | | | | | | | | | | |
Customer lists | | $ | 0 | | | $ | — | | | $ | — | | | $ | 0 | | | $ | 8,397 | |
Internal-use software | | 2,172 | | | — | | | — | | | 2,172 | | | 6,932 | |
Other | | 0 | | | — | | | — | | | 0 | | | 2,349 | |
Cloud Solutions Web Hosting assets | | | | | | | | | | 17,678 | |
Small business distributor | | 4,479 | | | — | | | — | | | 4,479 | | | 5,108 | |
Other assets | | 11,210 | | | — | | | — | | | 11,210 | | | 7,514 | |
Goodwill | | | | | | | | | | 67,673 | |
Total | | | | | | | | | | $ | 97,973 | |
|
| | | | |
(in thousands) | | Nine Months Ended September 30, 2019 |
Balance, December 31, 2018 | | $ | 2,396 |
|
Change in fair value | | 213 |
|
Payments | | (1,284 | ) |
Balance, September 30, 2019 | | $ | 1,325 |
|
Funds held for customers includedRecurring fair value measurements – Cash and cash equivalents and available-for-sale debt securities (Note 3). The cash equivalents consistedas of aSeptember 30, 2020 included investments in money market fund investmentfunds that is traded in an active market.have been designated as trading securities. Because of the short-term nature of the underlying investments, the cost of this investmentthese funds approximates itstheir fair value. Available-for-salevalues.
Funds held for customers included available-for-sale debt securities consisted of(Note 3). These securities included a money market fund that is traded in an active market, a mutual fund investment that invests in Canadian and provincial government
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
securities, and investments in Canadian guaranteed investment certificates (GICs) with maturities of 1 year or less.to 2 years. The cost of the money market fund approximates its fair value because of the short-term nature of the investment. The mutual fund investment is not traded in an active market and its fair value is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. The
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
fair value of the GICs approximated cost due to their relatively short duration. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss on the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue on the consolidated statements of comprehensive income (loss) income and were not significant for the quarters or nine months ended September 30, 20192020 and 2018.2019.
Information regarding the fair values of our financial instruments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair value measurements using |
| | | | September 30, 2020 | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
(in thousands) | | Balance sheet location | | Carrying value | | Fair value | | | |
Measured at fair value through comprehensive income (loss): | | | | | | | | | | | | |
Cash equivalents | | Cash and cash equivalents | | $ | 35,009 | | | $ | 35,009 | | | $ | 35,009 | | | $ | 0 | | | $ | 0 | |
Cash equivalents | | Funds held for customers | | $ | 7,000 | | | $ | 7,000 | | | $ | 7,000 | | | $ | 0 | | | $ | 0 | |
Available-for-sale debt securities | | Funds held for customers | | 16,613 | | | 16,613 | | | 0 | | | 16,613 | | | 0 | |
Derivative liability (Note 6) | | Other non-current liabilities | | (8,046) | | | (8,046) | | | 0 | | | (8,046) | | | 0 | |
Amortized cost: | | | | | | | | | | | | |
Cash | | Cash and cash equivalents | | 275,421 | | | 275,421 | | | 275,421 | | | 0 | | | 0 | |
Cash | | Funds held for customers | | 82,586 | | | 82,586 | | | 82,586 | | | 0 | | | 0 | |
Loans and notes receivable from Safeguard distributors | | Other current and non-current assets | | 41,583 | | | 41,261 | | | 0 | | | 0 | | | 41,261 | |
Long-term debt | | Long-term debt | | 1,040,000 | | | 1,040,000 | | | 0 | | | 1,040,000 | | | 0 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair value measurements using |
| | September 30, 2019 | | 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 (loss) income: | | | | | | | | | | |
Accrued contingent consideration | | $ | (1,325 | ) | | $ | (1,325 | ) | | $ | — |
| | $ | — |
| | $ | (1,325 | ) |
Measured at fair value through comprehensive (loss) income: | | | | | | | | | | |
Cash equivalents (funds held for customers) | | 14,000 |
| | 14,000 |
| | 14,000 |
| | — |
| | — |
|
Available-for-sale debt securities (funds held for customers) | | 16,209 |
| | 16,209 |
| | — |
| | 16,209 |
| | — |
|
Derivative liability (Note 7) | | (2,506 | ) | | (2,506 | ) | | — |
| | (2,506 | ) | | — |
|
Amortized cost: | | | | | | | | | | |
Cash | | 73,472 |
| | 73,472 |
| | 73,472 |
| | — |
| | — |
|
Cash (funds held for customers) | | 64,639 |
| | 64,639 |
| | 64,639 |
| | — |
| | — |
|
Loans and notes receivable from Safeguard distributors | | 71,189 |
| | 64,506 |
| | — |
| | — |
| | 64,506 |
|
Long-term debt | | 924,000 |
| | 924,000 |
| | — |
| | 924,000 |
| | — |
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair value measurements using |
| | December 31, 2018 | | 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 (loss) income: | | | | | | | | | | |
Accrued contingent consideration | | $ | (2,396 | ) | | $ | (2,396 | ) | | $ | — |
| | $ | — |
| | $ | (2,396 | ) |
Measured at fair value through comprehensive (loss) income: | | | | | | | | | | |
Cash equivalents (funds held for customers) | | 16,000 |
| | 16,000 |
| | 16,000 |
| | — |
| | — |
|
Available-for-sale debt securities (funds held for customers) | | 15,463 |
| | 15,463 |
| | — |
| | 15,463 |
| | — |
|
Amortized cost: | | | | | | | | | | |
Cash | | 59,740 |
| | 59,740 |
| | 59,740 |
| | — |
| | — |
|
Cash (funds held for customers) | | 69,519 |
| | 69,519 |
| | 69,519 |
| | — |
| | — |
|
Loans and notes receivable from Safeguard distributors | | 81,560 |
| | 60,795 |
| | — |
| | — |
| | 60,795 |
|
Long-term debt(1) | | 910,000 |
| | 910,000 |
| | — |
| | 910,000 |
| | — |
|
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair value measurements using |
| | | | December 31, 2019 | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
(in thousands) | | Balance sheet location | | Carrying value | | Fair value | | | |
Measured at fair value through comprehensive income (loss): | | | | | | | | | | | | |
Cash equivalents | | Cash and cash equivalents | | $ | 9,713 | | | $ | 9,713 | | | $ | 9,713 | | | $ | 0 | | | $ | 0 | |
Cash equivalents | | Funds held for customers | | 18,000 | | | 18,000 | | | 18,000 | | | 0 | | | 0 | |
Available-for-sale debt securities | | Funds held for customers | | 16,450 | | | 16,450 | | | 0 | | | 16,450 | | | 0 | |
Derivative liability (Note 6) | | Other non-current liabilities | | (1,480) | | | (1,480) | | | 0 | | | (1,480) | | | 0 | |
Amortized cost: | | | | | | | | | | | | |
Cash | | Cash and cash equivalents | | 63,907 | | | 63,907 | | | 63,907 | | | 0 | | | 0 | |
Cash | | Funds held for customers | | 83,191 | | | 83,191 | | | 83,191 | | | 0 | | | 0 | |
Loans and notes receivable from Safeguard distributors | | Other current and non-current assets | | 70,383 | | | 68,887 | | | 0 | | | 0 | | | 68,887 | |
Long-term debt | | Long-term debt | | 883,500 | | | 883,500 | | | 0 | | | 883,500 | | | 0 | |
(1) Amounts exclude capital lease obligations.
Note 9: Restructuring and integration expense | | |
NOTE 8: RESTRUCTURING AND INTEGRATION EXPENSE |
Restructuring and integration expense consists of costs related to the integration of acquired businesses into our systems and processes. It also includes costs related to the consolidation and migration of certain applications and processes, including our financial, sales and human resources management systemsystems. It also includes costs related to the integration of acquired businesses into our systems and certainprocesses and the rationalization of our sales and financial systems.real estate footprint. These costs consist primarily consist of information technology consulting, and project management services and internal labor, as well as other miscellaneous costs associated with our initiatives, such as training, travel and travel.relocation. In addition, we recorded employee severance costs related to these initiatives, as well as our ongoing cost reduction initiatives, across functional areas. Our restructuring and integration activities have increased in 2019, as weWe are currently pursuing several initiatives designed to focus our business behind our growth strategies and to increase our efficiency. Restructuring and integration expense is not allocated to our reportable business segments.
Restructuring and integration expense is reflected on the consolidated statements of comprehensive income (loss) as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Total cost of revenue | | $ | (26) | | | $ | 1,419 | | | $ | 831 | | | $ | 2,365 | |
Operating expenses | | 18,949 | | | 26,255 | | | 56,957 | | | 49,089 | |
Restructuring and integration expense | | $ | 18,923 | | | $ | 27,674 | | | $ | 57,788 | | | $ | 51,454 | |
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Restructuring and integration expense for each period consistedwas comprised of the following components:following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
External consulting fees | | $ | 14,898 | | | $ | 15,820 | | | $ | 37,136 | | | $ | 28,066 | |
Employee severance benefits | | 752 | | | 5,033 | | | 10,870 | | | 9,794 | |
Internal labor | | 2,218 | | | 3,078 | | | 5,200 | | | 8,927 | |
Other | | 1,055 | | | 3,743 | | | 4,582 | | | 4,667 | |
Restructuring and integration expense | | $ | 18,923 | | | $ | 27,674 | | | $ | 57,788 | | | $ | 51,454 | |
|
| | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except number of employees) | | 2019 | | 2018 | | 2019 | | 2018 |
Severance accruals | | $ | 5,124 |
| | $ | 2,118 |
| | $ | 10,270 |
| | $ | 6,766 |
|
Severance reversals | | (91 | ) | | (1,157 | ) | | (476 | ) | | (1,387 | ) |
Operating lease obligations | | — |
| | 291 |
| | — |
| | 291 |
|
Net accruals | | 5,033 |
| | 1,252 |
|
| 9,794 |
|
| 5,670 |
|
Other costs | | 22,641 |
| | 3,852 |
| | 41,660 |
| | 8,127 |
|
Restructuring and integration expense | | $ | 27,674 |
| | $ | 5,104 |
|
| $ | 51,454 |
|
| $ | 13,797 |
|
Number of employees included in severance accruals | | 180 |
| | 75 |
| | 270 |
| | 180 |
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
RestructuringOur restructuring and integration expense is reflectedaccruals represent expected cash payments required to satisfy the remaining severance obligations to those employees already terminated and those expected to be terminated under our various initiatives. These accruals are included in the consolidated statements of comprehensive (loss) income as follows:
|
| | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Total cost of revenue | | $ | 1,419 |
| | $ | (31 | ) | | $ | 2,365 |
| | $ | 882 |
|
Operating expenses | | 26,255 |
| | 5,135 |
| | 49,089 |
| | 12,915 |
|
Restructuring and integration expense | | $ | 27,674 |
| | $ | 5,104 |
|
| $ | 51,454 |
|
| $ | 13,797 |
|
Restructuring accruals of $6,138 as of September 30, 2019 are reflected inaccrued liabilities on the consolidated balance sheet as accrued liabilities. Accruals of $3,461 as of December 31, 2018 are reflected in the consolidated balance sheet as accrued liabilities of $3,320 and other non-current liabilities of $141.sheets. The majority of the related employee reductions are expected to be completed by the endfirst quarter of 2019,2021, and we expect most of the related severance payments to be paid by mid-2020. Asin the first half of 2021, utilizing cash from operations.
September 30, 2019, approximately 130 employees had not yet started to receive severance benefits.
RestructuringChanges in our restructuring and integration accruals summarized by year, were as follows:
| | | | | | | | |
(in thousands) | | Employee severance benefits |
Balance, December 31, 2019 | | $ | 3,459 | |
Charges | | 11,587 | |
Reversals | | (717) | |
Payments | | (11,985) | |
Balance, September 30, 2020 | | $ | 2,344 | |
|
| | | | | | | | | | | | | | | | |
(in thousands) | | 2019 initiatives | | 2018 initiatives | | 2017 initiatives | | Total |
Balance, December 31, 2018 | | $ | — |
| | $ | 3,448 |
| | $ | 13 |
| | $ | 3,461 |
|
Charges | | 9,919 |
| | 351 |
| | — |
| | 10,270 |
|
Reversals | | (155 | ) | | (308 | ) | | (13 | ) | | (476 | ) |
Payments | | (3,886 | ) | | (2,949 | ) | | — |
| | (6,835 | ) |
Adoption of ASU No. 2016-02(1) | | — |
| | (282 | ) | | — |
| | (282 | ) |
Balance, September 30, 2019 | | $ | 5,878 |
| | $ | 260 |
| | $ | — |
| | $ | 6,138 |
|
Cumulative amounts: | | |
| | | | | | |
|
Charges | | $ | 9,919 |
| | $ | 8,487 |
| | $ | 7,355 |
| | $ | 25,761 |
|
Reversals | | (155 | ) | | (1,720 | ) | | (726 | ) | | (2,601 | ) |
Payments | | (3,886 | ) | | (6,225 | ) | | (6,629 | ) | | (16,740 | ) |
Adoption of ASU No. 2016-02(1) | | — |
| | (282 | ) | | — |
| | (282 | ) |
Balance, September 30, 2019 | | $ | 5,878 |
|
| $ | 260 |
| | $ | — |
| | $ | 6,138 |
|
(1) Upon adoption of ASU No. 2016-02, Leasing, on January 1, 2019 (Note 2), our operating lease obligations accrual was reversedThe charges and reversals presented in the related operating lease asset was analyzed for impairment in accordance with the new guidance.
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The componentsrollforward of our restructuring and integration accruals by segment, weredo not include items charged directly to expense as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Employee severance benefits | | Operating lease obligations | | |
(in thousands) | | Small Business Services | | Financial Services | | Direct Checks | | Corporate(1) | | Small Business Services | | Financial Services | | Total |
Balance, December 31, 2018 | | $ | 1,326 |
| | $ | 1,397 |
| | $ | — |
| | $ | 456 |
| | $ | 282 |
| | $ | — |
| | $ | 3,461 |
|
Charges | | 3,309 |
| | 2,449 |
| | 168 |
| | 4,344 |
| | — |
| | — |
| | 10,270 |
|
Reversals | | (140 | ) | | (108 | ) | | (1 | ) | | (227 | ) | | — |
| | — |
| | (476 | ) |
Payments | | (1,944 | ) | | (2,570 | ) | | (107 | ) | | (2,214 | ) | | — |
| | — |
| | (6,835 | ) |
Adoption of ASU No. 2016-02(2) | | — |
| | — |
| | — |
| | — |
| | (282 | ) | | — |
| | (282 | ) |
Balance, September 30, 2019 | | $ | 2,551 |
| | $ | 1,168 |
|
| $ | 60 |
|
| $ | 2,359 |
|
| $ | — |
| | $ | — |
| | $ | 6,138 |
|
Cumulative amounts:(3) | | |
| | |
| | |
| | |
| | |
| | | | |
|
Charges | | $ | 7,848 |
| | $ | 8,615 |
| | $ | 311 |
| | $ | 8,367 |
| | $ | 329 |
| | $ | 291 |
| | $ | 25,761 |
|
Reversals | | (744 | ) | | (1,315 | ) | | (6 | ) | | (465 | ) | | — |
| | (71 | ) | | (2,601 | ) |
Payments | | (4,553 | ) | | (6,132 | ) | | (245 | ) | | (5,543 | ) | | (47 | ) | | (220 | ) | | (16,740 | ) |
Adoption of ASU No. 2016-02(2) | | — |
| | — |
| | — |
| | — |
| | (282 | ) | | — |
| | (282 | ) |
Balance, September 30, 2019 | | $ | 2,551 |
| | $ | 1,168 |
|
| $ | 60 |
|
| $ | 2,359 |
|
| $ | — |
| | $ | — |
| | $ | 6,138 |
|
(1) As discussed in Note 17, corporate costsincurred, as those items are allocated to our business segments. As such, the net corporate charges arenot reflected in the business segment operating (loss) income presented in Note 17 in accordance with our allocation methodology.
(2) Upon adoption of ASU No. 2016-02, Leasing, on January 1, 2019 (Note 2), our operating lease obligations accrual was reversed and the related operating lease asset was analyzed for impairment in accordance with the new guidance.
(3) Includes accruals related to our integration and cost reduction initiatives for 2017 through 2019.
Note 10: Chief Executive Officer transition costs
In April 2018, we announced the retirement of Lee Schram, our former Chief Executive Officer (CEO). Mr. Schram remained employed under the terms of a transition agreement through March 1, 2019. Under the terms of this agreement, we provided certain benefits to Mr. Schram, including a transition bonus in the amount of $2,000 that was paid in March 2019, 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 were earned based on the attainment of performance goals. The modifications to Mr. Schram's share-based payment awards resulted in expense of $2,088, which was largely recognized in 2018.
In conjunction with the CEO transition, we 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 to these expenses, we incurred certain other costs related to the CEO transition process, including executive search, legal, travel and board of directors fees in 2018. During 2019, we incurred consulting fees related to the evaluation of our strategic plan and we expensed the majority of the current CEO's signing bonus in 2019. CEO transition costs are included in SG&A expense on the consolidated statements of comprehensive (loss) income and were $1,145 for the quarter ended September 30, 2019, $2,622 for the quarter ended September 30, 2018, $8,539 for the nine months ended September 30, 2019 and $4,152 for the nine months ended September 30, 2018. Accruals for CEO transition costs were $3,925 as of September 30, 2019 and were included in accrued liabilities on the consolidated balance sheet. Accruals for CEO transition costs as of December 31, 2018 were $1,972 within accrued liabilities and $1,808 within other non-current liabilities.sheets.
DELUXE CORPORATION20
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Note 11: Income tax benefit (provision) | | |
NOTE 9: INCOME TAX PROVISION (BENEFIT) |
The effective tax rate on pre-tax (loss) incomeloss reconciles to the United StatesU.S. federal statutory tax rate of 21% as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | Year Ended December 31, 2019 |
Income tax at federal statutory rate | | 21.0 | % | | 21.0 | % |
Goodwill impairment charges | | (654.9 | %) | | (29.3 | %) |
Net tax impact of share-based compensation | | (105.2 | %) | | (1.1 | %) |
Research and development tax credit | | (3.3 | %) | | 0.6 | % |
Change in valuation allowances | | 0 | | | (4.5 | %) |
Foreign tax rate differences | | 4.5 | % | | 1.3 | % |
State income tax expense, net of federal income tax benefit | | 0.2 | % | | 4.9 | % |
Other | | (16.4 | %) | | (0.6 | %) |
Effective tax rate | | (754.1 | %) | | (7.7 | %) |
|
| | | | | | |
| | Nine Months Ended September 30, 2019 | | Year Ended December 31, 2018 |
Income tax at federal statutory rate | | 21.0 | % | | 21.0 | % |
Goodwill impairment charges (Note 8) | | (22.0 | %) | | 7.1 | % |
State income tax, net of federal income tax benefit | | 4.9 | % | | 3.0 | % |
Foreign deferred tax valuation allowance | | (3.4 | %) | | — |
|
Foreign tax rate differences | | 1.2 | % | | 0.4 | % |
Net tax impact of share-based compensation | | (0.7 | %) | | (0.8 | %) |
Impact of Tax Cuts and Jobs Act | | — |
| | (0.8 | %) |
Other | | (0.4 | %) | | (0.3 | %) |
Effective tax rate | | 0.6 | % | | 29.6 | % |
During the quarter ended September 30, 2019, we recorded asset impairment charges related to certain intangible assets located in Australia. As a result, we placed a full valuation allowance on the intangible-related deferred tax asset of $8,432, as we do not expect that we will realize the benefit of this deferred tax asset.
Note 12: Postretirement benefits | | |
NOTE 10: POSTRETIREMENT BENEFITS |
We have historically provided certain health care benefits for a large number of retired United StatesU.S. employees. In addition to our retiree health care plan, we also have a U.S. supplemental executive retirement plan in the United States.plan. Further information regarding our postretirement benefit plans can be found under the caption “Note 14: Postretirement benefits”Benefits” in the Notes to Consolidated Financial Statements appearing in the 20182019 Form 10-K.
Postretirement benefit income is included in other income on the consolidated statements of comprehensive income (loss) income and consisted of the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Interest cost | | $ | 478 | | | $ | 682 | | | $ | 1,434 | | | $ | 2,046 | |
Expected return on plan assets | | (1,905) | | | (1,740) | | | (5,714) | | | (5,218) | |
Amortization of prior service credit | | (355) | | | (355) | | | (1,066) | | | (1,066) | |
Amortization of net actuarial losses | | 575 | | | 806 | | | 1,725 | | | 2,417 | |
Net periodic benefit income | | $ | (1,207) | | | $ | (607) | | | $ | (3,621) | | | $ | (1,821) | |
|
| | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Interest cost | | $ | 682 |
| | $ | 656 |
| | $ | 2,046 |
| | $ | 1,969 |
|
Expected return on plan assets | | (1,740 | ) | | (1,934 | ) | | (5,218 | ) | | (5,802 | ) |
Amortization of prior service credit | | (355 | ) | | (355 | ) | | (1,066 | ) | | (1,066 | ) |
Amortization of net actuarial losses | | 806 |
| | 721 |
| | 2,417 |
| | 2,163 |
|
Net periodic benefit income | | $ | (607 | ) | | $ | (912 | ) | | $ | (1,821 | ) | | $ | (2,736 | ) |
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Debt outstanding was comprisedconsisted of amounts drawn on our revolving credit facility of $1,040,000 as of September 30, 2020 and $883,500 as of December 31, 2019. In March 2020, in conjunction with our response to the COVID-19 pandemic, we drew an additional $238,000 on our credit facility, due to uncertainty in how the commercial capital and credit markets would operate during the pandemic. During July 2020, we repaid $100,000 of the following:
|
| | | | | | | | |
(in thousands) | | September 30, 2019 | | December 31, 2018 |
Amount drawn on revolving credit facility | | $ | 924,000 |
| | $ | 910,000 |
|
Capital lease obligations(1) | | — |
| | 1,864 |
|
Long-term debt, principal amount | | 924,000 |
| | 911,864 |
|
Less current portion of long-term debt | | — |
| | (791 | ) |
Long-term debt | | 924,000 |
| | 911,073 |
|
Current portion of capital lease obligations(1) | | — |
| | 791 |
|
Long-term debt due within one year | | — |
| | 791 |
|
Total debt | | $ | 924,000 |
| | $ | 911,864 |
|
(1) Upon adoption of ASU No. 2016-02, Leasing, on January 1, 2019 (Note 2), we reclassified our capital lease obligations, now known as finance lease obligations, to accrued liabilities and other non-current liabilities on the consolidated balance sheet.
There are currently no limitations on the amount of dividends and share repurchasesdrawn under the termscredit facility, and in October 2020, we repaid an additional $140,000. As of our credit agreement. However, if our leverage ratio, defined as total debt less unrestrictedSeptember 30, 2020, we held cash to EBITDA, should exceed 2.75 to 1, there would be an annual limitation on the amountand cash equivalents of dividends and share repurchases.$310,430.
As of December 31, 2018, we had aSeptember 30, 2020, the total availability under our revolving credit facility in the amount of $950,000. In January 2019, we increasedwas $1,150,000. The facility includes an accordion feature allowing us, subject to lender consent, to increase the credit facility by $200,000, bringing the total availability to $1,150,000, subject to increase under the credit agreementcommitment to an aggregate amount not exceeding $1,425,000. The credit facility matures in March 2023. Our quarterly commitment fee ranges from 0.175% to 0.35%, based on our leverage ratio. Amounts drawn under the credit facility had a weighted-average interest rate of 3.29%1.93% as of September 30, 20192020 and 3.79%3.03% as of December 31, 2018.2019. In July 2019, we executed an interest rate swap to convert $200,000 of the amount drawn under the credit facility to fixed rate debt. Further information can be found in Note 7.6.
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 requires us to maintain certain financial ratios, including a maximum leverage ratio of 3.5 and a minimum ratio of consolidated earnings before interest and taxes to consolidated interest expense, as defined in the credit agreement, of 3.0. Additionally, the agreement contains customary representations and warranties including, as a condition to borrowing, that all such representations and warranties are true and correct in all material respects on the date of the borrowing, including representations as to no material adverse change in our business, assets, operations or financial condition.
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 1, there would be an annual limitation on the amount of dividends and share repurchases.
Daily average amounts outstanding under our credit facility were as follows:
| | | | | | | | | | | | | | |
(in thousands) | | Nine Months Ended September 30, 2020 | | Year Ended December 31, 2019 |
Daily average amount outstanding | | $ | 1,042,350 | | | $ | 925,715 | |
Weighted-average interest rate | | 2.17 | % | | 3.54 | % |
|
| | | | | | | | |
(in thousands) | | Nine Months Ended September 30, 2019 | | Year Ended December 31, 2018 |
Revolving credit facility: | | | | |
Daily average amount outstanding | | $ | 933,934 |
| | $ | 731,110 |
|
Weighted-average interest rate | | 3.69 | % | | 3.24 | % |
Term loan facility:(1) | | | | |
Daily average amount outstanding | | $ | — |
| | $ | 63,638 |
|
Weighted-average interest rate | | — |
| | 2.97 | % |
(1) During 2018, we had borrowings outstanding under a variable rate term loan facility. TheseThe following table shows amounts were repaid in March 2018.
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
As of September 30, 2019, amounts were available for borrowing under our revolving credit facility as follows:of September 30, 2020. In October 2020, we repaid $140,000 of the amount drawn on the facility. This amount remains available to us for borrowing.
| | | | | | | | |
(in thousands) | | Total available |
Revolving credit facility commitment | | $ | 1,150,000 | |
Amount drawn on revolving credit facility | | (1,040,000) | |
Outstanding letters of credit(1) | | (7,428) | |
Net available for borrowing as of September 30, 2020 | | $ | 102,572 | |
|
| | | | |
(in thousands) | | Total available |
Revolving credit facility commitment | | $ | 1,150,000 |
|
Amount drawn on revolving credit facility | | (924,000 | ) |
Outstanding letters of credit(1) | | (5,733 | ) |
Net available for borrowing as of September 30, 2019 | | $ | 220,267 |
|
(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.
Note 14: Leases
We have entered into operating leases for the majority of our facilities. These real estate leases have remaining terms of up to 10.0 years, with a weighted-average remaining term of 5.5 years as of September 30, 2019. We utilize leases for these facilities to limit our exposure to risks related to ownership, such as fluctuations in real estate prices, and to maintain flexibility in our real estate utilization. We have also entered into operating leases for certain equipment, primarily production printers and data center equipment. Certain of our leases include options to extend the lease term. The impact of renewal periods was not significant to the amounts recorded for operating lease assets and liabilities.
We have entered into finance leases for certain information technology hardware. The net book value of the related lease assets was $1,164 as of September 30, 2019 and the related lease liabilities were $1,545. The lease obligations are due through December 2022 and do not have a significant impact on our consolidated statements of comprehensive (loss) income or our consolidated statements of cash flows.
Operating lease expense was $6,363 for the quarter ended September 30, 2019 and $15,145 for the nine months ended September 30, 2019. Additional information regarding our operating leases was as follows:
|
| | | | |
(in thousands) | | Nine Months Ended September 30, 2019 |
Operating cash outflows | | $ | 12,329 |
|
Lease assets obtained during the period in exchange for lease obligations | | 5,501 |
|
| | |
| | September 30, 2019 |
Operating lease assets | | $ | 41,739 |
|
| | |
Accrued liabilities | | 12,840 |
|
Operating lease liabilities | | 32,434 |
|
Total operating lease liabilities | | $ | 45,274 |
|
Weighted-average remaining lease term (in years) | | 5.2 |
|
Weighted-average discount rate | | 3.6 | % |
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Maturities of operating lease liabilities were as follows:
|
| | | | |
(in thousands) | | Operating leases |
Remainder of 2019 | | $ | 3,332 |
|
2020 | | 14,626 |
|
2021 | | 10,954 |
|
2022 | | 7,593 |
|
2023 | | 3,731 |
|
Thereafter | | 11,334 |
|
Total lease payments | | 51,570 |
|
Less imputed interest | | (6,296 | ) |
Present value of lease payments | | $ | 45,274 |
|
| | |
NOTE 12: OTHER COMMITMENTS AND CONTINGENCIES |
Note 15: Other commitments
Leases– During the third quarter of 2020, we executed leases on 2 new facilities, located in Georgia and contingenciesMinnesota, with terms of 6 and 16 years, respectively. As a result, our total lease obligations increased approximately $65,000, with approximately $5,000 due in 2021 - 2022, approximately $13,000 due in 2023 - 2024, and the remainder due through 2037. As these leases have not yet commenced, they are not reflected on our consolidated balance sheet as of September 30, 2020.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Indemnifications – In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. These 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 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 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 and that we would These liabilities were 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 $2,272significant as of September 30, 2019 and $2,755 as of 2020 or December 31, 2018. These accruals are included in accrued liabilities and other non-current liabilities on 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 not significant for the quarters or nine months ended September 30, 2019 and 2018.
We maintain an insurance policy that covers up to $10,000 of third-party pollution claims through 2032 at certain owned, leased and divested sites. We also maintain a policy that covers up to $15,000 of third-party pollution claims through April 2022 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. NaN 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 2019.
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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 $7,596$9,079 as of September 30, 20192020 and $6,627$7,576 as of December 31, 2018.2019. These accruals are included in accrued liabilities and other non-current liabilities on 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 30, 20192020 or December 31, 2018.2019.
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, as well as related charges recorded in each period, were not material to our financial position, results of operations or liquidity during the quarters or nine months ended September 30, 2019 and 2018,periods presented, 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.
Note 16: Shareholders’ equity | | |
Note 13: SHAREHOLDERS' EQUITY |
In October 2018, our board of directors authorized the repurchase of up to $500,000 of our common stock. This authorization has no expiration date. NaN shares were repurchased during the third quarter of 2020. During the first nine months ended September 30, 2019,of 2020, we repurchased 2.6 million499 thousand shares for $118,547.$14,000. As of September 30, 2019, $301,4522020, $287,452 remained available for repurchase under the authorization.
Note 17: Business segment information
| | |
NOTE 14: BUSINESS SEGMENT INFORMATION |
As of September 30, 2019,
For many years, we operated 3 reportable business segments: Small Business Services, Financial Services and Direct Checks. Our businessThese segments arewere generally organized by customer type of customer served and reflectreflected the way we currently managemanaged the company. Small Business Services promotesEffective January 1, 2020, we reorganized our reportable business segments to align with structural and sells products and services to small businesses via direct response mail and internet advertising; referrals from financial institutions, telecommunications clients and others; networksmanagement reporting changes in support of Safeguard distributors and independent dealers; a direct sales force that focuses on selling to and through enterprise accounts; and an outbound telemarketing group. Financial Services' products and services are sold primarily through a direct sales force that executesour growth strategy. We now operate 4 reportable segments, generally organized by product and service supply contracts with our financial institution clients, including banks, credit unions and financial services companies. 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. Small Business Services also has operations in Canada, Australia and portions of Europe, and Financial Services has operations in Canada.type, as follows:
Our product and service offerings are comprised of the following:
Marketing solutions and other services (MOS)•Payments – We offer products and services designed to meetThis segment includes our customers' sales and marketing needs, as well as various other service offerings. 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.
Treasurytreasury management solutions, – These Financial Services solutions includeincluding remittance and lockbox processing, remote deposit capture, receivables management, payment processing and paperless treasury management, as well as software, hardwarein addition to payroll and digital imaging solutions.disbursement services, including Deluxe Payment Exchange and fraud and security services.
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Web services•Cloud Solutions – These service offerings includeThis segment includes web hosting and domain namedesign services, data-driven marketing solutions and hosted solutions, including digital engagement, logo and web design, search engine marketing and optimization, email marketing, payroll servicesfinancial institution profitability reporting, account switching tools and business incorporation services.
•Promotional Solutions – This segment includes business forms, accessories, advertising specialties, promotional apparel, retail packaging and organizationstrategic sourcing services.
Data-driven marketing solutions – These Financial Services offerings include outsourced marketing campaign targeting and execution and marketing analytics solutions that help our customers grow revenue through strategic targeting, lead optimization, retention and cross-selling services.
Fraud, security, risk management and operational services – These service offerings include fraud protection and security services, electronic checks and deposits ("ePayments") and digital engagement solutions, including loyalty and rewards programs and finacial management tools.
•Checks – We remain one of the largest providers ofThis segment includes printed personal and business checks in the United States.checks.
23
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, as well as computer forms compatible with accounting software packages commonly used by small businesses. Small Business Services also offers other customized 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.
The following tables present revenue disaggregated by our product and service offerings:
|
| | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2019 |
(in thousands) | | Small Business Services | | Financial Services | | Direct Checks | | Consolidated |
Marketing solutions and other services: | | | | | | | | |
Small business marketing solutions | | $ | 68,258 |
| | $ | — |
| | $ | — |
| | $ | 68,258 |
|
Treasury management solutions | | — |
| | 45,836 |
| | — |
| | 45,836 |
|
Web services | | 40,906 |
| | — |
| | — |
| | 40,906 |
|
Data-driven marketing solutions | | — |
| | 39,889 |
| | — |
| | 39,889 |
|
Fraud, security, risk management and operational services | | 6,171 |
| | 12,749 |
| | 3,144 |
| | 22,064 |
|
Total MOS | | 115,335 |
| | 98,474 |
| | 3,144 |
| | 216,953 |
|
Checks | | 115,392 |
| | 53,111 |
| | 24,330 |
| | 192,833 |
|
Forms, accessories and other products | | 79,484 |
| | 3,014 |
| | 1,309 |
| | 83,807 |
|
Total revenue | | $ | 310,211 |
| | $ | 154,599 |
| | $ | 28,783 |
| | $ | 493,593 |
|
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
(in thousands) | | Small Business Services | | Financial Services | | Direct Checks | | Consolidated |
Marketing solutions and other services: | | | | | | | | |
Small business marketing solutions | | $ | 203,192 |
| | $ | — |
| | — |
| | $ | 203,192 |
|
Treasury management solutions | | — |
| | 136,782 |
| | — |
| | 136,782 |
|
Web services | | 125,856 |
| | — |
| | — |
| | 125,856 |
|
Data-driven marketing solutions | | — |
| | 115,469 |
| | — |
| | 115,469 |
|
Fraud, security, risk management and operational services | | 18,339 |
| | 37,278 |
| | 9,899 |
| | 65,516 |
|
Total MOS | | 347,387 |
| | 289,529 |
| | 9,899 |
| | 646,815 |
|
Checks | | 349,116 |
| | 165,778 |
| | 75,587 |
| | 590,481 |
|
Forms, accessories and other products | | 235,268 |
| | 9,779 |
| | 4,302 |
| | 249,349 |
|
Total revenue | | $ | 931,771 |
| | $ | 465,086 |
| | $ | 89,788 |
| | $ | 1,486,645 |
|
|
| | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2018 |
(in thousands) | | Small Business Services | | Financial Services | | Direct Checks | | Consolidated |
Marketing solutions and other services: | | | | | | | | |
Small business marketing solutions | | $ | 69,490 |
| | $ | — |
| | $ | — |
| | $ | 69,490 |
|
Treasury management solutions | | — |
| | 35,833 |
| | — |
| | 35,833 |
|
Web services | | 41,973 |
| | — |
| | — |
| | 41,973 |
|
Data-driven marketing solutions | | — |
| | 39,808 |
| | — |
| | 39,808 |
|
Fraud, security, risk management and operational services | | 6,383 |
| | 12,953 |
| | 3,460 |
| | 22,796 |
|
Total MOS | | 117,846 |
| | 88,594 |
| | 3,460 |
| | 209,900 |
|
Checks | | 117,918 |
| | 54,800 |
| | 25,874 |
| | 198,592 |
|
Forms, accessories and other products | | 79,835 |
| | 3,377 |
| | 1,486 |
| | 84,698 |
|
Total revenue | | $ | 315,599 |
| | $ | 146,771 |
| | $ | 30,820 |
| | $ | 493,190 |
|
| | | | | | | | |
| | Nine Months Ended September 30, 2018 |
(in thousands) | | Small Business Services | | Financial Services | | Direct Checks | | Consolidated |
Marketing solutions and other services: | | | | | | | | |
Small business marketing solutions | | $ | 205,694 |
| | $ | — |
| | $ | — |
| | $ | 205,694 |
|
Treasury management solutions | | — |
| | 93,591 |
| | — |
| | 93,591 |
|
Web services | | 120,199 |
| | — |
| | — |
| | 120,199 |
|
Data-driven marketing solutions | | — |
| | 114,275 |
| | — |
| | 114,275 |
|
Fraud, security, risk management and operational services | | 19,487 |
| | 37,856 |
| | 10,761 |
| | 68,104 |
|
Total MOS | | 345,380 |
| | 245,722 |
| | 10,761 |
| | 601,863 |
|
Checks | | 360,637 |
| | 170,442 |
| | 81,425 |
| | 612,504 |
|
Forms, accessories and other products | | 243,638 |
| | 10,563 |
| | 4,781 |
| | 258,982 |
|
Total revenue | | $ | 949,655 |
| | $ | 426,727 |
| | $ | 96,967 |
| | $ | 1,473,349 |
|
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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 September 30, 2019: | | | | | | | | |
United States | | $ | 286,025 |
| | $ | 149,575 |
| | $ | 28,783 |
| | $ | 464,383 |
|
Foreign, primarily Canada and Australia | | 24,186 |
| | 5,024 |
| | — |
| | 29,210 |
|
Total revenue | | $ | 310,211 |
| | $ | 154,599 |
| | $ | 28,783 |
| | $ | 493,593 |
|
Nine Months Ended September 30, 2019: | | | | | | | | |
United States | | $ | 857,759 |
| | $ | 451,126 |
| | $ | 89,788 |
| | $ | 1,398,673 |
|
Foreign, primarily Canada and Australia | | 74,012 |
| | 13,960 |
| | — |
| | 87,972 |
|
Total revenue | | $ | 931,771 |
| | $ | 465,086 |
| | $ | 89,788 |
| | $ | 1,486,645 |
|
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Small Business Services | | Financial Services | | Direct Checks | | Total |
Quarter Ended September 30, 2018: | | | | | | | | |
United States | | $ | 290,752 |
| | $ | 141,979 |
| | $ | 30,820 |
| | $ | 463,551 |
|
Foreign, primarily Canada and Australia | | 24,847 |
| | 4,792 |
| | — |
| | 29,639 |
|
Total revenue | | $ | 315,599 |
| | $ | 146,771 |
| | $ | 30,820 |
| | $ | 493,190 |
|
Nine Months Ended September 30, 2018: | | | | | | | | |
United States | | $ | 871,574 |
| | $ | 411,185 |
| | $ | 96,967 |
| | $ | 1,379,726 |
|
Foreign, primarily Canada and Australia | | 78,081 |
| | 15,542 |
| | — |
| | 93,623 |
|
Total revenue | | $ | 949,655 |
| | $ | 426,727 |
| | $ | 96,967 |
| | $ | 1,473,349 |
|
The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in the 20182019 Form 10-K. We allocate corporate costs for our shared services functions to our business segments includingwhen the costs of our executive management,are directly attributable to a segment. This includes certain sales and marketing, human resources, supply chain, real estate, finance, information technology and legal functions. Where costs incurredcosts. Costs that are directly attributable to a business segment, those costs are charged directly to that segment. Those costs not directly attributable to a business segment primarily certain human resources costs, are allocated to the segments based on the number of employees in each segment.reported as Corporate assets are not allocated to the segmentsoperations and consistedconsist primarily of long-term investments and assets related to our corporate shared services functions of manufacturing,marketing, accounting, information technology, facilities, executive management and real estate, including property, plantlegal, tax and equipment; internal-use software;treasury costs that support the corporate function. Corporate operations also includes other income. All of our segments operate primarily in the U.S., with some operations in Canada. In addition, Cloud Solutions has operations in Australia and portions of Europe, as well as partners in Central and South America.
Under the new segment structure, our chief operating lease assets;decision maker (i.e., our Chief Executive Officer) reviews earnings before interest, taxes, depreciation and inventoriesamortization (EBITDA) on an adjusted basis for each segment when deciding how to allocate resources and supplies.
We are an integrated enterprise, characterized by substantial intersegment cooperation, cost allocationsto assess segment operating performance. Adjusted EBITDA for each segment excludes depreciation and sharing of assets. Therefore, we do not represent that these segments, if operated independently, would report the operating (loss)amortization expense, interest expense, income tax expense and certain other amounts, which may include, from time to time: asset impairment charges; restructuring, integration and other financialcosts; CEO transition costs; share-based compensation expense; acquisition transaction costs; certain legal-related expense; and gains or losses on sales of businesses and customer lists. Our Chief Executive Officer does not review segment asset information shown.
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
when making investment or operating decisions regarding our reportable business segments.
The following is our segment information as of and for the quarters and nine months ended September 30, 20192020 and 2018:2019. The segment information for 2019 has been revised to reflect our current segment structure.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Payments: | | | | | | | | |
Revenue | | $ | 74,675 | | | $ | 64,634 | | | $ | 223,886 | | | $ | 193,888 | |
Adjusted EBITDA | | 16,746 | | | 17,199 | | | 50,352 | | | 52,037 | |
Cloud Solutions: | | | | | | | | |
Revenue | | 63,758 | | | 79,976 | | | 193,600 | | | 237,178 | |
Adjusted EBITDA | | 16,425 | | | 20,216 | | | 45,494 | | | 56,362 | |
Promotional Solutions: | | | | | | | | |
Revenue | | 124,929 | | | 156,835 | | | 385,667 | | | 468,209 | |
Adjusted EBITDA | | 21,478 | | | 22,909 | | | 46,529 | | | 68,787 | |
Checks: | | | | | | | | |
Revenue | | 176,099 | | | 192,148 | | | 533,135 | | | 587,370 | |
Adjusted EBITDA | | 84,954 | | | 98,782 | | | 258,392 | | | 300,887 | |
Total segment: | | | | | | | | |
Revenue | | $ | 439,461 | | | $ | 493,593 | | | $ | 1,336,288 | | | $ | 1,486,645 | |
Adjusted EBITDA | | 139,603 | | | 159,106 | | | 400,767 | | | 478,073 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Reportable Business Segments | | | | |
(in thousands) | | | | Small Business Services | | Financial Services | | Direct Checks | | Corporate | | Consolidated |
Total revenue from external customers: | | 2019 | | $ | 310,211 |
| | $ | 154,599 |
| | $ | 28,783 |
| | $ | — |
| | $ | 493,593 |
|
| | 2018 | | 315,599 |
| | 146,771 |
| | 30,820 |
| | — |
| | 493,190 |
|
Operating (loss) income: | | 2019 | | (243,193 | ) | | (105,691 | ) | | 8,201 |
| | — |
| | (340,683 | ) |
| | 2018 | | (45,254 | ) | | 17,612 |
| | 10,360 |
| | — |
| | (17,282 | ) |
Depreciation and amortization expense: | | 2019 | | 14,497 |
| | 15,220 |
| | 777 |
| | — |
| | 30,494 |
|
| | 2018 | | 17,173 |
| | 15,424 |
| | 809 |
| | — |
| | 33,406 |
|
Asset impairment charges: | | 2019 | | 273,583 |
| | 117,397 |
| �� | — |
| | — |
| | 390,980 |
|
| | 2018 | | 97,288 |
| | 1,882 |
| | — |
| | — |
| | 99,170 |
|
Total assets: | | 2019 | | 809,058 |
| | 560,405 |
| | 155,487 |
| | 364,013 |
| | 1,888,963 |
|
| | 2018 | | 1,056,086 |
| | 753,240 |
| | 157,806 |
| | 300,235 |
| | 2,267,367 |
|
Capital asset purchases: | | 2019 | | — |
| | — |
| | — |
| | 17,335 |
| | 17,335 |
|
| | 2018 | | — |
| | — |
| | — |
| | 14,526 |
| | 14,526 |
|
24
| | |
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 nine months ended September 30, 2019 and 2018: |
| | | | | | | | | | | | |
| | | | Reportable Business Segments | | | | |
(in thousands) | | | | Small Business Services | | Financial Services | | Direct Checks | | Corporate | | Consolidated |
Total revenue from external customers: | | 2019 | | $ | 931,771 |
| | $ | 465,086 |
| | $ | 89,788 |
| | $ | — |
| | $ | 1,486,645 |
|
| | 2018 | | 949,655 |
| | 426,727 |
| | 96,967 |
| | — |
| | 1,473,349 |
|
Operating (loss) income: | | 2019 | | (163,805 | ) | | (86,134 | ) | | 24,853 |
| | — |
| | (225,086 | ) |
| | 2018 | | 72,288 |
| | 49,565 |
| | 31,396 |
| | — |
| | 153,249 |
|
Depreciation and amortization expense: | | 2019 | | 47,730 |
| | 45,231 |
| | 2,469 |
| | — |
| | 95,430 |
|
| | 2018 | | 48,765 |
| | 45,740 |
| | 2,418 |
| | — |
| | 96,923 |
|
Asset impairment charges: | | 2019 | | 273,583 |
| | 117,397 |
| | — |
| | — |
| | 390,980 |
|
| | 2018 | | 99,437 |
| | 1,882 |
| | — |
| | — |
| | 101,319 |
|
Total assets: | | 2019 | | 809,058 |
| | 560,405 |
| | 155,487 |
| | 364,013 |
| | 1,888,963 |
|
| | 2018 | | 1,056,086 |
| | 753,240 |
| | 157,806 |
| | 300,235 |
| | 2,267,367 |
|
Capital asset purchases: | | 2019 | | — |
| | — |
| | — |
| | 49,679 |
| | 49,679 |
|
| | 2018 | | — |
| | — |
| | — |
| | 42,566 |
| | 42,566 |
|
The following table presents a reconciliation of total segment adjusted EBITDA to consolidated income (loss) before income taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Total segment adjusted EBITDA | | $ | 139,603 | | | $ | 159,106 | | | $ | 400,767 | | | $ | 478,073 | |
Corporate operations | | (37,090) | | | (39,770) | | | (131,101) | | | (127,543) | |
Depreciation and amortization | | (27,972) | | | (30,494) | | | (83,065) | | | (95,430) | |
Interest expense | | (5,083) | | | (8,710) | | | (18,254) | | | (27,251) | |
Pre-tax income attributable to non-controlling interest | | 21 | | | 0 | | | 46 | | | 0 | |
Asset impairment charges | | (2,760) | | | (390,980) | | | (97,973) | | | (390,980) | |
Restructuring, integration and other costs | | (18,941) | | | (29,723) | | | (59,064) | | | (53,699) | |
CEO transition costs(1) | | 0 | | | (1,145) | | | (10) | | | (8,539) | |
Share-based compensation expense | | (6,240) | | | (5,356) | | | (15,335) | | | (14,016) | |
Acquisition transaction costs | | 0 | | | (13) | | | (9) | | | (193) | |
Certain legal-related expenses | | 0 | | | 0 | | | 2,165 | | | (6,417) | |
Loss on sales of customer lists | | 0 | | | (125) | | | (18) | | | (224) | |
Income (loss) before income taxes | | $ | 41,538 | | | $ | (347,210) | | | $ | (1,851) | | | $ | (246,219) | |
(1) In 2019, includes adjustments to share-based compensation expense related to the modification of certain awards in conjunction with our CEO transition.
The following tables present revenue disaggregated by our product and service offerings. In conjunction with the realignment of our reportable segments on January 1, 2020, we refined the disaggregation of our revenue by product and service offering. As such, certain amounts reported in the prior year have been revised from previously reported amounts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2020 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
Checks | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 176,099 | | | $ | 176,099 | |
Forms and other products | | 0 | | | 0 | | | 77,492 | | | 0 | | | 77,492 | |
Treasury management solutions | | 55,418 | | | 0 | | | 0 | | | 0 | | | 55,418 | |
Marketing and promotional solutions | | 0 | | | 0 | | | 47,437 | | | 0 | | | 47,437 | |
Web and hosted solutions | | 0 | | | 33,250 | | | 0 | | | 0 | | | 33,250 | |
Data-driven marketing solutions | | 0 | | | 30,508 | | | 0 | | | 0 | | | 30,508 | |
Other payments solutions | | 19,257 | | | 0 | | | 0 | | | 0 | | | 19,257 | |
Total revenue | | $ | 74,675 | | | $ | 63,758 | | | $ | 124,929 | | | $ | 176,099 | | | $ | 439,461 | |
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2019 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
Checks | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 192,148 | | | $ | 192,148 | |
Forms and other products | | 0 | | | 0 | | | 86,184 | | | 0 | | | 86,184 | |
Treasury management solutions | | 45,836 | | | 0 | | | 0 | | | 0 | | | 45,836 | |
Marketing and promotional solutions | | 0 | | | 0 | | | 70,651 | | | 0 | | | 70,651 | |
Web and hosted solutions | | 0 | | | 38,892 | | | 0 | | | 0 | | | 38,892 | |
Data-driven marketing solutions | | 0 | | | 41,084 | | | 0 | | | 0 | | | 41,084 | |
Other payments solutions | | 18,798 | | | 0 | | | 0 | | | 0 | | | 18,798 | |
Total revenue | | $ | 64,634 | | | $ | 79,976 | | | $ | 156,835 | | | $ | 192,148 | | | $ | 493,593 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
Checks | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 533,135 | | | $ | 533,135 | |
Forms and other products | | 0 | | | 0 | | | 234,735 | | | 0 | | | 234,735 | |
Treasury management solutions | | 167,078 | | | 0 | | | 0 | | | 0 | | | 167,078 | |
Marketing and promotional solutions | | 0 | | | 0 | | | 150,932 | | | 0 | | | 150,932 | |
Web and hosted solutions | | 0 | | | 104,673 | | | 0 | | | 0 | | | 104,673 | |
Data-driven marketing solutions | | 0 | | | 88,927 | | | 0 | | | 0 | | | 88,927 | |
Other payments solutions | | 56,808 | | | 0 | | | 0 | | | 0 | | | 56,808 | |
Total revenue | | $ | 223,886 | | | $ | 193,600 | | | $ | 385,667 | | | $ | 533,135 | | | $ | 1,336,288 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
Checks | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 587,370 | | | $ | 587,370 | |
Forms and other products | | 0 | | | 0 | | | 257,553 | | | 0 | | | 257,553 | |
Treasury management solutions | | 136,782 | | | 0 | | | 0 | | | 0 | | | 136,782 | |
Marketing and promotional solutions | | 0 | | | 0 | | | 210,656 | | | 0 | | | 210,656 | |
Web and hosted solutions | | 0 | | | 120,514 | | | 0 | | | 0 | | | 120,514 | |
Data-driven marketing solutions | | 0 | | | 116,664 | | | 0 | | | 0 | | | 116,664 | |
Other payments solutions | | 57,106 | | | 0 | | | 0 | | | 0 | | | 57,106 | |
Total revenue | | $ | 193,888 | | | $ | 237,178 | | | $ | 468,209 | | | $ | 587,370 | | | $ | 1,486,645 | |
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
The following tables present revenue disaggregated by geography, based on where items are shipped from or where services are performed:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2020 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
United States | | $ | 66,377 | | | $ | 55,755 | | | $ | 118,454 | | | $ | 170,865 | | | $ | 411,451 | |
Foreign, primarily Canada and Australia | | 8,298 | | | 8,003 | | | 6,475 | | | 5,234 | | | 28,010 | |
Total revenue | | $ | 74,675 | | | $ | 63,758 | | | $ | 124,929 | | | $ | 176,099 | | | $ | 439,461 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2019 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
United States | | $ | 56,088 | | | $ | 71,300 | | | $ | 150,336 | | | $ | 186,659 | | | $ | 464,383 | |
Foreign, primarily Canada and Australia | | 8,546 | | | 8,676 | | | 6,499 | | | 5,489 | | | 29,210 | |
Total revenue | | $ | 64,634 | | | $ | 79,976 | | | $ | 156,835 | | | $ | 192,148 | | | $ | 493,593 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
United States | | $ | 198,965 | | | $ | 169,917 | | | $ | 369,023 | | | $ | 516,961 | | | $ | 1,254,866 | |
Foreign, primarily Canada and Australia | | 24,921 | | | 23,683 | | | 16,644 | | | 16,174 | | | 81,422 | |
Total revenue | | $ | 223,886 | | | $ | 193,600 | | | $ | 385,667 | | | $ | 533,135 | | | $ | 1,336,288 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
United States | | $ | 169,130 | | | $ | 210,929 | | | $ | 448,049 | | | $ | 570,565 | | | $ | 1,398,673 | |
Foreign, primarily Canada and Australia | | 24,758 | | | 26,249 | | | 20,160 | | | 16,805 | | | 87,972 | |
Total revenue | | $ | 193,888 | | | $ | 237,178 | | | $ | 468,209 | | | $ | 587,370 | | | $ | 1,486,645 | |
| | |
NOTE 15: RISKS AND UNCERTAINTIES |
The impact on our business of the COVID-19 pandemic continues to evolve. As such, we are uncertain of the impact on our future financial condition, liquidity and/or results of operations. This uncertainty affected several of the assumptions made and estimates used in the preparation of these consolidated financial statements. As discussed in Note 7, the COVID-19 pandemic resulted in a goodwill impairment triggering event during the first quarter of 2020, as the adverse economic effects of the pandemic materially decreased demand for the products and services we provide to our customers, particularly through our Promotional Solutions and Cloud Solutions segments. The extent to which the pandemic will continue to impact our business depends on future developments, including the severity and duration of the pandemic, business and workforce disruptions and the ultimate number of businesses that fail. Our evaluation of asset impairment required us to make assumptions about these future events over the life of the assets being evaluated. This required significant judgment and actual results may differ significantly from our estimates. As a result of the continuing effects of COVID-19, we may be required to record additional goodwill or other asset impairment charges in the future.
We held loans and notes receivable from our Safeguard distributors of $41,583 as of September 30, 2020. These distributors sell their products and services primarily to small businesses, which have been significantly impacted by the COVID-19 pandemic. As of September 30, 2020, our allowance for expected credit losses on these receivables was $4,278, although the majority of this amount was not driven by impacts of the pandemic. We utilized all information known to us in determining this allowance, as well as allowances related to our trade accounts receivable and unbilled receivables. If our assumptions prove to be incorrect, we may be required to record additional bad debt expense in the future. Additionally,
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
uncertainty surrounding the impact of the COVID-19 outbreak could affect estimates we made regarding inventory obsolescence and workers' compensation liabilities and thus, could result in additional expense in the future.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | | |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following Management’sOur Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the consolidated unaudited financial statements and related notes included in Part I, Item 1 of this Form 10-Q. 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 herein. Interim results are not necessarily indicative of results for a full year.
Our 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 upcoming year;
•Consolidated Results of Operations; Restructuring, Integration and Other Costs; CEO Transition Costs and Segment Results that includeincludes a more detailed discussion of our revenue and 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;
•Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations that discusses our financial commitments; and
•Critical Accounting Policies that discusses the policies we believe are most important to understanding the assumptions and judgments underlying our financial statements.
Please note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20182019 (the "20182019 Form 10-K")10-K) outlines known material risks and important information to consider when evaluating our forward-looking statements and is incorporated into this Item 2 of this report on Form 10-Q as if fully stated herein. Updates to the risk factors discussed in the 20182019 Form 10-K are included in Part II, Item 1A of this report on Form 10-Q. 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 make the following 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, investor presentations and in oral statements made by our representatives, they indicate forward-looking statements within the meaning of the Reform Act.
This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the United States of AmericaU.S. (GAAP). In addition, we discuss free cash flow, net debt, adjusted diluted earnings per share (EPS) and consolidated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), all of which is aare non-GAAP financial measure.measures. We believe that thisthese non-GAAP financial measure,measures, when reviewed in conjunction with GAAP financial measures, can provide useful information to assist investors in analyzing our current period operating performance and in assessing our future period operating performance. For this reason, our internal management reporting also includes adjusted diluted EPS,these financial measures, which should be considered in addition to, and not as superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Our measure of adjusted diluted EPSnon-GAAP financial measures may not be comparable to similarly titled measures used by other companies and therefore, may not result in useful comparisons. The detailed reconciliation of diluted EPSour non-GAAP financial measures to adjusted diluted EPSthe most directly comparable GAAP financial measures can be found in Consolidated Results of Operations.Operations.
Our unaudited consolidated statement of cash flows for the nine months ended September 30, 2018 has been revised to correct a misstatement associated with the presentation of restricted cash and restricted cash equivalents included in funds held for customers on our consolidated balance sheet. Further information regarding this misstatement can be found under the caption "Note 1: Consolidated financial statements" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.
EXECUTIVE OVERVIEW
As of September 30, 2019,Realignment – For many years, we operated 3 reportable business segments: Small Business Services, Financial Services and Direct Checks. OurThese segments were generally organized by customer type and reflected the way we managed the company. Effective January 1, 2020, we reorganized our reportable business segments to align with structural and management reporting changes in support of our growth strategy. We now operate 4 reportable segments: Payments, Cloud Solutions, Promotional Solutions and Checks. These segments are generally organized by product type of customer served and reflect the way we currently manage the company. Further information regarding our segments and our product and service offerings can be found under the caption "Note 17:14: Business segment information"Segment Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
NetCOVID-19 impacton 2020 results – The COVID-19 pandemic began to impact our operations late in the first quarter of 2020. Total revenue for the second quarter of 2020 declined 16.9%, as compared to the second quarter of 2019, and total revenue for the third quarter of 2020 declined 11.0%, as compared to the third quarter of 2019. While revenue in both periods benefited from sales-driven growth, it was not sufficient to overcome the impact of COVID-19. The pandemic primarily impacted revenue volumes in our Promotional Solutions, Checks and Cloud Solutions segments. Within Promotional Solutions, many of
our business customers have been significantly impacted by their customers' and governmental responses to the pandemic. Demand for promotional products declined, as our customers reduced or stopped virtually all promotional activities when they were forced to close, and many of their operations are still limited. The decline in travel and event cancellations also reduced promotional spending. In Checks, we have seen a decline in business checks resulting from the slowdown in the economy stemming from government-mandated shutdowns and limitations. Personal check volumes also slowed at a somewhat lesser rate. The impact in Cloud Solutions has been primarily driven by a decline in data-driven marketing solutions, as clients suspended their marketing campaigns during this period of uncertainty. Partially offsetting the volume declines was new revenue of $29.5 million during the first nine months of 2020 from sales of personal protective equipment (PPE) in our Promotional Solutions segment.
The impact of COVID-19 on our revenue was most severe in April. It began to improve throughout the remainder of the second quarter and through third quarter, as well. Adjusted EBITDA margin was 23.3% for the third quarter of 2020, an increase of 290 basis points over the second quarter of 2020, and better than our annual expectations prior to the pandemic. To bolster our liquidity, we drew an additional $238.0 million on our $1.15 billion revolving credit facility in March 2020 and we suspended share repurchases in both the second and third quarters. We also took steps to reduce discretionary spending and other expenditures in line with our revenue declines. These steps included temporary salary reductions for all salaried employees, including our leadership team and board of directors, project delays, furloughs and other actions. We also delayed U.S. federal payroll tax payments under the Coronavirus Aid, Relief and Economic Security (CARES) Act. As a result of these actions and our stronger than expected performance, free cash flow for the first nine months of 2020 was $124.1 million, compared to $158.3 million for the first nine months of 2019, and net debt as of September 30, 2020 was the lowest since June 30, 2018. As a result of our strong cash flow, we were able to end the temporary salary reductions, effective July 1, 2020. We also repaid $100.0 million of the amount drawn on our revolving credit facility during July 2020, and we repaid an additional $140.0 million in October 2020. Our priority is to maintain our financial strength, while simultaneously continuing our business transformation. While we reduced some expenditures during the first half of 2020, we have decided to selectively resume certain capital projects and to continue important systems implementation work, including our enterprise resource planning and sales technology implementations. Also, we paid our regular quarterly dividend of $0.30 per share in both June and September 2020.
We continue to monitor the impact of COVID-19 on all aspects of our business, including our operations, suppliers, customers, industry and workforce. We are keeping 2 primary goals in mind: (1) protecting employees, customers and their respective families and (2) continuing to serve the customers who rely on us. The situation surrounding COVID-19 remains fluid, and the potential for additional negative impacts on our results of operations, financial condition and/or liquidity increases the longer the virus impacts activity levels in the U.S. and the other countries in which we operate. During the first quarter of 2020, we successfully activated our business continuity plan to ensure uninterrupted operations and services. We have not experienced any significant interruptions in our supply chain to-date, and we currently do not expect significant future interruptions. Many of our facilities remain open, employees who have the ability to work from home continue to do so and the success of our work-from-home model allowed us to accelerate certain site closures.
2020 results vs. 2019 – Numerous factors drove the decrease in net loss for the first nine months of 20192020, as compared to the first nine months of $244.72019. Factors that decreased net loss included:
•a decrease in pre-tax asset impairment charges of $293.0 million, as compared to 2019;
•actions taken to reduce costs in line with reduced revenues and the continuing evaluation of our cost structure, including savings of approximately $25.0 million from the temporary salary reductions, suspension of the 401(k) plan employer matching contribution, discretionary spending reductions and furloughs;
•revenue growth, including increased treasury management revenue, increases in certain data-driven marketing campaigns in the first quarter of 2020 prior to the commencement of the impact of the COVID-19 pandemic, and new revenue from sales of PPE in 2020;
•a decrease in acquisition amortization of $12.2 million, driven in part by previous asset impairment charges;
•a decrease in certain legal-related expenses of $8.6 million; and
•the absence of non-recurring CEO transition costs in 2020, as compared to $8.5 million in 2019.
Partially offsetting these decreases in net loss were the following factors:
•the loss of revenue resulting from the impact of the COVID-19 pandemic;
•various investments of approximately $35.0 million to advance our One Deluxe strategy, including costs related to treasury management deals signed in the fourth quarter of 2019 and various information technology, sales, finance and human capital investments;
•the continuing secular decline in checks and forms, the loss of web hosting revenue in the third quarter of 2019 and the decision to exit certain product lines within Cloud Solutions;
•incremental costs of approximately $7.0 million resulting from our response to COVID-19, including a Hero Pay premium provided to employees working on-site during the second quarter of 2020, costs related to enabling employees to work from home and additional facility cleaning costs;
•a $5.6 million increase in bad debt expense in 2020 related to notes receivable from our Safeguard distributors;
•a $5.4 million increase in restructuring, integration and other costs in support of our strategy and to increase our efficiency; and
•the change in our effective income tax rate, as compared to the prior year.
Diluted loss per share of $92.5 million$0.40 for the first nine months of 2018, reflected an increase in asset impairment charges of $289.7 million (as described below), an increase in restructuring and integration expense of $37.7 million in support of our growth strategies and2020, as compared to increase our efficiency, as well as continued volume reductions in personal and business checks and forms, due primarily to the secular decline in check and forms usage. Additionally, medical costs increased approximately $11.0 million, interest expense increased $8.3 million, organic web services and treasury management revenue declined, and the Small Business Services commission rate increased. Stock-based compensation increased $5.6 million, driven by an increase in the level of equity awards in 2019, Chief Executive Officer (CEO) transition costs increased $4.4 million, and check pricing allowances within Financial Services continued. We also recognized gains from sales of businesses and customer lists within Small Business Services of $12.9 million in the first nine months of 2018. These increases in net loss were partially offset by a benefit of approximately $35.0 million from continuing initiatives to reduce our cost structure, primarily within our sales, marketing and fulfillment organizations, the benefit of Small Business Services price increases and incremental earnings from businesses acquired in 2018.
Diluteddiluted loss per share of $5.65 for the first nine months of 2019, of $5.65, as compared to diluted EPS of $1.93 for the first nine months of 2018, reflects the decrease inlower net incomeloss as described in the preceding paragraph, partially offset byparagraphs, as well as lower average shares outstanding in 2019.
2020. Adjusted diluted EPS for the first nine months of 20192020 was $4.88,$3.70, compared to $5.01$4.88 for the first nine months of 2018,2019, and excludes the impact of non-cash items or items that we believe are not indicative of ongoing operations. A reconciliation of diluted earnings (loss) earnings per share to adjusted diluted EPS can be found in Consolidated Results of Operations.
Asset impairment charges – Net loss for the first nine months of 2019 was driven by the impact of pretax2020 included pre-tax asset impairment charges of $98.0 million, or $1.45 per share. The impairment charges related primarily to the goodwill of our Promotional Solutions and Cloud Solutions Web Hosting reporting units, as well as certain intangibles in our Cloud Solutions Web Hosting reporting unit. Net loss for the third quarterfirst nine months of 2019 included pre-tax asset impairment charges of $391.0 million, or $7.92 per share. The impairment charges related to the goodwill of our former Small Business Services Web Services and Financial Services Data-Driven Marketing reporting units, as well as amortizable intangible assets,certain intangibles, primarily in our former Small Business Services Web Services reporting unit. Further information regarding these impairment charges can be found in Critical Accounting Policies. This compares to asset impairment charges of $101.3 million, or $1.95 per share, in the first nine months of 2018. Further information regarding the 2018 asset impairment charges can be found in Critical Accounting Policies in the MD&A section of the 2018 Form 10-K.
"New Deluxe" Strategy
Throughout the past several years, as the use of checks and forms has continued to decline, we have focused on opportunities to increase revenue and operating income and to diversify our revenue streams and customer base. 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 channels, and reducing costs. In addition, we invested in various acquisitions that extended the range of products and services we offer to our customers. Information about our acquisitions can be found under the caption "Note 6: Acquisitions"7: Fair Value Measurements" of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report and under the caption "Note 8: Fair Value Measurements" in the Notes to Consolidated Financial Statements appearing in the 20182019 Form 10-K.
We have moved beyond diversification as part
"One Deluxe" Strategy
A detailed discussion of our transformation into a Trusted, Tech-Enabled Solutions CompanyTM. Our growth strategy focuses on organic growth, supplemented by acquisitions, rather than being dependent on acquisitions for growth. The shiftcan be found in our strategic focus requires us to fundamentally change our go-to-market strategy, operating model and organizational design. We expect that fully integrating past acquisitions and consolidating and standardizing our technology platforms will enable us to operate as one Deluxe, selling allPart I, Item 1 of the 2019 Form 10-K. In support of our products and services to any customer. We plan to invest between $40.0 million and $45.0 million in 2019 and between $30.0 million and $60.0 million in 2020strategy, we are investing significant resources to build out our technology platforms, includingplatforms. We completed the implementation of a human capital management system in January 2020. We also are investing in sales technology that will enableenables a single view of our customer,customers, thereby providing for deeper cross-sell opportunities. WeIn addition, we are also investing in our human capital managementfinancial tools, including an enterprise resource planning system and a financial managementplanning and planning systems to enable integration and replacement of duplicative and aging collaboration tools and platforms.analysis system. Strategically, we believe these enhancements will allow us to better assess and manage our business at the total company level and will make it easier for us to quickly integrate any future acquisitions. These investments will consist of capital and expense items, which we plan to fund from structural cost savings and free cash flow. However, we expect that timing differences will impact our ability to self-fund through efficiency savings alone.
As we move forward, we intend to focus on growth businesses with recurring revenue streams, scalable business models, attractive cost structures, data-rich business models and strong price-to-earnings ratios. We will first focus on accelerating revenue growth organically and then supplement growth with selective, strategic acquisitions. While we willreduced certain expenditures at the onset of the COVID-19 pandemic, we have since decided to continue important systems implementation work and we are continuing to sell to enterprise, smallinvest in these initiatives.
Effective January 1, 2020, we began managing the company based on our product and service offerings, focusing on our 4 new business financial services and individual customers, our business will not be organized by customer type in the future. Instead, we intend to focus our efforts on 4 primary business areas:segments: Payments, Cloud Solutions, Promotional ProductsSolutions and Checks. We expect to reinvest free cash flow into the 2 areassegments we view as our primary platforms for growth: Payments and Cloud. Our intent isCloud Solutions. Realignments such as this take time, considerable senior management effort, material "buy-in" from employees and significant investment. We continue to realignmake progress on our business segmentstransformation and have the capabilitymany of our investments are beginning to report our operating results under the new structure, both internally and externally, in early 2020.deliver positive results. During the transition period,first 2 months of 2020, prior to the COVID-19 pandemic, we planwere on track to implementdeliver consolidated sales-driven revenue growth. Even during the pandemic, treasury management revenue grew over 22% for the first nine months of 2020, as compared to 2019. Despite the pandemic, we continue to execute new sales contracts, renew existing sales contracts and drive successful tele-sales efforts. We were able to quickly enter the PPE market and generated revenue of approximately $29.5 million in our Promotional Solutions segment during the first nine months of 2020. We continue to drive new market share wins across our segments, cross-sell our solutions to existing customers, and enhance our distribution channels. While still in the midst of our transformation, we are finding that our new strategy while delivering onOne Deluxe structure is able to quickly respond to our annual plancustomers' needs and consistently paying a dividend to shareholders.drive profitable revenue growth.
Outlook for 2019
2020
Due to the continuing uncertainties surrounding the current business environment and a second wave of COVID-19 during the fourth quarter of 2020, we are not providing detailed financial guidance at this time. We expect revenue for the fourth quarter of 2020 to be softer than the third quarter of 2020 on a year-over-year percentage basis, due to expected customer implemention delays in treasury management and data-driven marketing, which may be attributable to the COVID-19 pandemic. This will be
most evident in Payments, where we expect a temporary slowing of double-digit revenue growth to low- to mid-single digit growth. We also decided to divest several product lines in Cloud Solutions and that, combined with a second wave of COVID-19, will impact fourth quarter revenue. In Checks, we believe the secular decline in volume sequentially improved during the third quarter of 2020, likely benefiting from some delayed second quarter volume. We expect the revenue recovery to be slightly lower in the fourth quarter of 2020, as compared to the third quarter, and we expect check volumes to return to traditional secular trends with the overall recovery in the economy. Despite these challenges, we anticipate that our consolidated adjusted EBITDA margin for the fourth quarter of 2020 will remain at our long-term target of 20% or better.
In response to the pandemic, we took actions to manage expenses in line with revenue declines, including temporary salary reductions for all salaried employees, including our leadership team and board of directors, project delays, furloughs and other actions. Based on our second quarter results, we ended the temporary salary reductions, effective July 1, 2020. Furloughs continue in certain facilities that lack product demand to remain open. In late June, we exited approximately 250 employees, as we continue to develop our post-COVID-19 operating model to match our expected future volumes and to gain efficiencies. Also during the second and third quarters of 2020, we announced plans to lower future operating expenses through further site consolidation, including relocating existing sites in Minnesota and Georgia. We made the decision to close over 30 facilities, some of which have already been closed, with the remainder expected to be closed through 2021. These facilities contain primarily sales and administrative functions, and most of the impacted employees will convert to a work-from-home model. We anticipate annual operating expense savings of more than $10.0 million from these facility closures, once they are complete.
We held cash and cash equivalents of $310.4 million as of September 30, 2020. In July 2020, we repaid $100.0 million of the amount drawn on our revolving credit facility, and in October 2020, we repaid an additional $140.0 million. These amounts remain available to us for borrowing, with $900.0 million drawn on the facility after these repayments. Our credit facility includes an accordion feature allowing us, subject to lender consent, to expand the facility to $1.425 billion. We anticipate that consolidated revenuewe will be at the low endcontinue to pay our regular quarterly dividend. However, dividends are approved by our board of our previous outlook range of $2.005 billiondirectors each quarter and thus, are subject to $2.045 billion for 2019, compared to $1.998 billion for 2018.change. We expect that 2019 adjusted diluted EPS will be at the low end of our previous outlook range of $6.65 to $6.95, compared to $6.88 for 2018.
We continue to anticipate that net cash provided by operating activities will be between $270.0 million and $285.0 million in 2019, compared to $339.3 million in 2018, driven primarily by increased restructuring and integration activities in support of our growth strategies and to increase our efficiency, the continuing secular decline in check and forms usage, the
payment of certain legal-related expenses, including $12.5 million accrued in the prior year and paid in the first quarter of 2019, and higher interest payments, partially offset by benefits from our cost savings initiatives and lower income tax payments. We believe that cash generated by operating activities,operations, along with the cash and cash equivalents on hand and availability under our revolving credit facility, will be sufficient to support our operations and to meet our financial commitments for the next 12 months, including capital expenditures of approximately $75.0 million, dividend payments, required interest payments, and periodic share repurchases,months. We were in compliance with our debt covenants as well as possible acquisitions. As of September 30, 2019, $220.3 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, both organically2020, and through acquisitions. Wewe anticipate that we will remain in compliance with our board of directors will maintain our current dividend level. However, dividends are approved bydebt covenants throughout the board of directors on a quarterly basis, and thus are subject to change. To the extent we generate excess cash, we expect to opportunistically repurchase common shares and/or reduce the amount outstanding under our credit facility.next 12 months.
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CONSOLIDATED RESULTS OF OPERATIONS |
Consolidated Revenue
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| | Quarter Ended September 30, | Nine Months Ended September 30, |
(in thousands, except per order amounts) | | 2019 | | 2018 | | Change | 2019 | | 2018 | | Change |
Total revenue | | $ | 493,593 |
| | $ | 493,190 |
| | 0.1 | % | $ | 1,486,645 |
| | $ | 1,473,349 |
| | 0.9 | % |
Orders(1) | | 11,925 |
| | 11,595 |
| | 2.8 | % | 35,295 |
| | 35,555 |
| | (0.7 | %) |
Revenue per order | | $ | 41.39 |
| | $ | 42.53 |
| | (2.7 | %) | $ | 42.12 |
| | $ | 41.44 |
| | 1.6 | % |
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Total revenue | | $ | 439,461 | | | $ | 493,593 | | | (11.0%) | | $ | 1,336,288 | | | $ | 1,486,645 | | | (10.1%) |
(1) Orders is our company-wide measure of volume and includes both products and services.
The slight increasedecreases in total revenue for the third quarter and first nine months of 2019,2020, as compared to the third quarter of 2018, was2019, were driven primarily by incrementalvolume declines resulting from the impact of the COVID-19 pandemic, primarily in our Promotional Solutions, Checks and Cloud Solutions segments. In addition, revenue of approximately $11.3 million from businesses acquired in 2018, as well as Small Business Services price increases and an increase of approximately $5.0 million relatedcontinued to 1 additional business day in 2019. Information regarding our acquisitions can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K. These increases in revenue were partially offsetimpacted by the continuingsecular decline in order volume for both personalchecks and business checks, as well as forms and accessories sold by Small Business Services. In addition, Small Business Servicesforms. Cloud Solutions web services volume, excluding incrementalhosting revenue from a business acquiredalso declined, due to our decision in 2018, declined approximately $2.0 million. Revenue was also negatively impacted during the third quarter of 2019 by continued check pricing allowances within Financial Services.
The increase in total revenue forto exit certain customer contracts, the first nine monthsloss of 2019, as compared to the first nine months of 2018, was driven primarily by incremental revenue of approximately $62.2 million from businesses acquired in 2018, as well as Small Business Services price increases. Information regarding our acquisitions can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K. These increases in revenue were partially offset by the continuing decline in order volume for both personal and business checks, as well as forms and accessories sold by Small Business Services. In addition, Small Business Services web services and Financial Services treasury management volume, excluding incremental revenue from businesses acquired in 2018, declined approximately $6.0 million and $4.0 million, respectively. Revenue was also negatively impacted during the first nine months of 2019 by continued check pricing allowances within Financial Services.
The number of orders increasedcertain large customers in the third quarter of 2019 as comparedthey elected to the third quarter of 2018, as the impact of growth in marketing solutions and other services (MOS) revenue, including the impact of our 2018 acquisitions, exceeded the impactin-source some of the continuing secular declineservices we provide, previous under-investment in checkthis business and forms usage. The numberthe decision to exit certain product lines. These decreases in revenue were partially offset by new revenue from sales of orders decreasedPPE in our Promotional Solutions segment of $29.5 million for the first nine months of 2019, as compared to2020, primarily in the first nine monthssecond quarter of 2018, due primarily to the continuing secular decline in check and forms usage, partially offset by growth in MOS, including the impact ofyear. Also, treasury management revenue within our 2018 acquisitions. The decrease in revenue per orderPayments segment increased 20.9% for the third quarter of 20192020 and the increase in revenue per order22.1% for the first nine months of 2019, as compared2020, driven primarily by lockbox processing outsourcing deals signed in the fourth quarter of 2019. In addition, for the first nine months of 2020, revenue benefited from new data-driven marketing campaigns and growth in pay-for-performance marketing campaigns in our Cloud Solutions segment, prior to the same periods in 2018, were primarily driven bycommencement of the mix of product and service revenue in each period, as well as the benefit of Small Business Services price increases and the negative impact of continued check pricing allowances in Financial Services.the COVID-19 pandemic.
Service revenue represented 29.8%32.0% of total revenue for the first nine months of 20192020 and 27.0%29.8% for the first nine months of 2018. As such, the majority of our revenue is generated by product sales.2019. We do not manage our business based on product versus service revenue. Instead, we analyze our revenuesrevenue based on the following categories:product and service offerings shown under the caption: "Note 14: Business Segment Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. Our revenue mix by business segment was as follows:
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Payments | | 17.0 | % | | 13.1 | % | | 16.7 | % | | 13.0 | % |
Cloud Solutions | | 14.5 | % | | 16.2 | % | | 14.5 | % | | 16.0 | % |
Promotional Solutions | | 28.4 | % | | 31.8 | % | | 28.9 | % | | 31.5 | % |
Checks | | 40.1 | % | | 38.9 | % | | 39.9 | % | | 39.5 | % |
Total revenue | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Marketing solutions and other services: | | | | | | | | |
Small business marketing solutions | | 13.8 | % | | 14.1 | % | | 13.7 | % | | 14.0 | % |
Treasury management solutions | | 9.3 | % | | 7.3 | % | | 9.2 | % | | 6.3 | % |
Web services | | 8.3 | % | | 8.5 | % | | 8.4 | % | | 8.2 | % |
Data-driven marketing solutions | | 8.1 | % | | 8.1 | % | | 7.8 | % | | 7.8 | % |
Fraud, security, risk management and operational services | | 4.4 | % | | 4.6 | % | | 4.4 | % | | 4.6 | % |
Total MOS | | 43.9 | % | | 42.6 | % | | 43.5 | % | | 40.9 | % |
Checks | | 39.1 | % | | 40.3 | % | | 39.7 | % | | 41.5 | % |
Forms, accessories and other products | | 17.0 | % | | 17.1 | % | | 16.8 | % | | 17.6 | % |
Total revenue | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Consolidated Cost of Revenue
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Total cost of revenue | | $ | 174,461 | | | $ | 203,723 | | | (14.4%) | | $ | 538,792 | | | $ | 605,875 | | | (11.1%) |
Total cost of revenue as a percentage of total revenue | | 39.7 | % | | 41.3 | % | | (1.6) pts. | | 40.3 | % | | 40.8 | % | | (0.5) pts. |
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Total cost of revenue | | $ | 203,723 |
| | $ | 197,634 |
| | 3.1 | % | | $ | 605,875 |
| | $ | 576,594 |
| | 5.1 | % |
Total cost of revenue as a percentage of total revenue | | 41.3 | % | | 40.1 | % | | 1.2 | pts. | | 40.8 | % | | 39.1 | % | | 1.7 | 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 digital service offerings, and related overhead.
The increasesdecreases in total cost of revenue for the third quarter and first nine months of 2019,2020, as compared to the same periods in 2018,2019, were primarily attributable to incremental coststhe decrease in revenue volume resulting from the COVID-19 impact. In addition, cost of businesses acquiredrevenue decreased as a result of the continued secular decline in 2018checks and forms, as well as changes in client mix in the Cloud Solutions segment. Benefits from cost reductions and efficiencies in our fulfillment area, unrelated to our response to the COVID-19 pandemic, reduced cost of $5.9revenue approximately $2.0 million for the third quarter of 20192020 and $31.4$6.0 million for the first nine months of 2019, as well as increased shipping and material rates and higher medical2020, while actions taken to reduce costs in 2019. In addition, restructuring and integration expense increased $1.5 million for both the third quarter and first nine months of 2019. Partially offsetting these increases in totalresponse to COVID-19 reduced cost of revenue was the impact of the lower order volume for both personal and business checks, as well as forms and accessories sold by Small Business Services. In addition, manufacturing efficiencies and other benefits resulting from our continued cost reduction initiatives resulted in a reduction in total cost of revenue of approximately $3.0$2.0 million for the third quarter of 20192020 and $8.0$5.0 million for the first nine months of 2019.2020. Partially offsetting these decreases in cost of revenue were costs related to the new revenue from PPE sales in both periods, costs related to treasury management deals signed in the fourth quarter of 2019 and incremental costs driven by COVID-19 of approximately $5.0 million for the first nine months of 2020. Total cost of revenue as a percentage of total revenue increaseddecreased in both periods, as compared to 2018,due in large part, due to the increasechange in service revenues, includingrevenue mix driven by the loss of lower margin revenue resulting from the COVID-19 impact. The positive impact of our 2018 acquisitions, as well as the increased shipping, materials, medical, restructuring and integration costs,change in mix was partially offset by Small Business Services price increases.costs related to the new treasury management clients.
Consolidated Selling, General & Administrative (SG&A) Expense
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
SG&A expense | | $ | 198,871 | | | $ | 213,318 | | | (6.8%) | | $ | 634,645 | | | $ | 665,787 | | | (4.7%) |
SG&A expense as a percentage of total revenue | | 45.3 | % | | 43.2 | % | | 2.1 pts. | | 47.5 | % | | 44.8 | % | | 2.7 pts. |
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
SG&A expense | | $ | 213,318 |
| | $ | 208,533 |
| | 2.3 | % | | $ | 665,787 |
| | $ | 629,272 |
| | 5.8 | % |
SG&A expense as a percentage of total revenue | | 43.2 | % | | 42.3 | % | | 0.9 | pts. | | 44.8 | % | | 42.7 | % | | 2.1 | pts. |
The increasedecreases in SG&A expense for the third quarter of 2019, as compared to the third quarter of 2018, was driven by incremental costs of $4.9 million from businesses acquired in 2018, including acquisition amortization. In addition, information technology costs related to infrastructure investments increased, we incurred business transformation costs of $2.0 million in the third quarter of 2019, share-based compensation expense increased approximately $2.0 million, driven by an
increase in the level of equity awards in 2019, and medical costs continued to increase. Also, during the third quarter of 2018, we recognized gains from sales of businesses and customer lists within Small Business Services of $1.8 million. Further information regarding these asset sales can be found under the caption "Note 3: Supplemental balance sheet and cash flow information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. These increases in SG&A expense were partially offset by various expense reduction initiatives of approximately $9.0 million, primarily within our sales and marketing organizations. Also, amortization expense related to acquisitions prior to 2018 decreased approximately $5.0 million for the third quarter of 2019 compared to the third quarter of 2018.
The increase in SG&A expense for the first nine months of 2019, as compared to the first nine months of 2018, was driven by incremental costs of $26.1 million from businesses acquired in 2018, including acquisition amortization, medical costs increased approximately $6.0 million, information technology costs related to infrastructure investments and the average Small Business Services commission rate increased, and share-based compensation expense increased approximately $5.0 million, driven by an increase in the level of equity awards in 2019. In addition, CEO transition costs increased $4.4 million, and legal-related expenses increased approximately $4.0 million. Also, during the first nine months of 2018, we recognized gains from sales of businesses and customer lists within Small Business Services of $12.9 million. Further information regarding these asset sales can be found under the caption "Note 3: Supplemental balance sheet and cash flow information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report. These increases in SG&A expense were partially offset by various expense reduction initiatives of approximately $27.0 million, primarily within our sales and marketing organizations. Also, amortization expense related to acquisitions prior to 2018 decreased approximately $9.5 million for the first nine months of 2019 compared to the first nine months of 2018.
Restructuring and Integration Expense
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Restructuring and integration expense | | $ | 26,255 |
| | $ | 5,135 |
| | $ | 21,120 |
| | $ | 49,089 |
| | $ | 12,915 |
| | $ | 36,174 |
|
Restructuring and integration expense increased for the third quarter and first nine months of 2019,2020, as compared to 2019, were driven by lower commissions in both periods on the samelower order volume resulting from COVID-19, as well as the benefit of organizational actions taken in response to COVID-19, including the temporary salary reductions and the suspension of the 401(k) plan employer matching contribution. These actions lowered SG&A expense approximately $8.0 million for the third quarter of 2020 and $20.0 million for the first nine months of 2020. Also lowering SG&A expense were various cost reduction actions that were unrelated to our response to the COVID-19 pandemic. These decreases in SG&A expense were partially offset by investments of approximately $10.0 million for the third quarter of 2020 and $35.0 million for the first nine months of 2020, in support of our One Deluxe strategy. These costs related to treasury management outsourcing deals signed in the fourth quarter of 2019 and various
other expenses related to initiatives such as transforming our brand and our website and expanding our sales capabilities, as well as ongoing new costs related to software-as-a-service solutions we are employing throughout the company. In addition, we incurred commission expense related to new revenue from the sales of PPE during both periods. During the first nine months of 2020, we also recorded bad debt expense of $5.6 million in our Promotional Solutions segment related to notes receivable from our Safeguard distributors, primarily one distributor that was underperforming prior to the commencement of the COVID-19 pandemic.
In addition to the above factors, SG&A expense was also impacted by changes in the following items:
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Acquisition amortization (SG&A portion) | | $ | 10,649 | | | $ | 13,469 | | | $ | (2,820) | | | $ | 31,988 | | | $ | 45,520 | | | $ | (13,532) | |
Certain legal-related expense | | — | | | — | | | — | | | (2,165) | | | 6,417 | | | (8,582) | |
CEO transition costs | | — | | | 1,145 | | | (1,145) | | | 10 | | | 8,539 | | | (8,529) | |
Total SG&A expense as a percentage of revenue increased in both periods, as revenue declines and investments in 2018, as weour transformation more than offset the benefit of cost reductions during these periods.
Restructuring and Integration Expense
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Restructuring and integration expense | | $ | 18,949 | | | $ | 26,255 | | | $ | (7,306) | | | $ | 56,957 | | | $ | 49,089 | | | $ | 7,868 | |
We are currently pursuing several initiatives designed to focus our business behind our growth strategiesstrategy and to increase our efficiency. Further information can be found under Restructuring, Integration and Other Costs.
Asset Impairment Charges
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Asset impairment charges | | $ | 390,980 |
| | $ | 99,170 |
| | $ | 291,810 |
| | $ | 390,980 |
| | $ | 101,319 |
| | $ | 289,661 |
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Asset impairment charges | | $ | 2,760 | | | $ | 390,980 | | | $ | (388,220) | | | $ | 97,973 | | | $ | 390,980 | | | $ | (293,007) | |
During the third quarter of 2020, we recorded pre-tax asset impairment charges of $2.8 million, primarily related to an underperforming small business distributor that we previously purchased.
During the first nine months of 2020, we recorded pre-tax asset impairment charges of $98.0 million, related primarily to the goodwill of our Promotional Solutions and Cloud Solutions Web Hosting reporting units and amortizable intangibles of our Cloud Solutions Web Hosting reporting unit. 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 Part I, Item 1 of this report.
During the third quarter and first nine months of 2019, we recorded pretaxpre-tax asset impairment charges of $391.0 million related to goodwill and certain trade name, customer list and technology intangible assets. Further information regarding these charges can be found in Critical Accounting Policies.
Duringunder the third quarter of 2018, we recorded pretax asset impairment charges of $99.2 million related to Small Business Services goodwill and an indefinite-lived trade name, as well as certain customer list intangible assets within Financial Services related to 2 small business distributors we acquired in 2015. During the 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. Further information regarding these charges can be found in Critical Accounting Policiescaption "Note 8: Fair Value Measurements" in the MD&A section ofNotes to Consolidated Financial Statements appearing in the 20182019 Form 10-K.
Interest Expense
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Interest expense | | $ | 5,083 | | | $ | 8,710 | | | (41.6%) | | $ | 18,254 | | | $ | 27,251 | | | (33.0%) |
Weighted-average debt outstanding | | 1,058,478 | | | 931,092 | | | 13.7% | | 1,042,350 | | | 933,934 | | | 11.6% |
Weighted-average interest rate | | 1.9 | % | | 3.5 | % | | (1.6) pts. | | 2.2 | % | | 3.7 | % | | (1.5) pts. |
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Interest expense | | $ | 8,710 |
| | $ | 7,244 |
| | 20.2 | % | | $ | 27,251 |
| | $ | 18,953 |
| | 43.8 | % |
Weighted-average debt outstanding | | 931,092 |
| | 841,151 |
| | 10.7 | % | | 933,934 |
| | 767,045 |
| | 21.8 | % |
Weighted-average interest rate | | 3.5 | % | | 3.2 | % | | 0.3 | pts. | | 3.7 | % | | 3.1 | % | | 0.6 | pts. |
The increasesdecreases in interest expense for the third quarter and first nine months of 2019,2020, as compared to the same periods in 2018,2019, were primarily driven by our higherlower weighted-average interest rate in both periods, as well as the higher weighted-average debt level arising, in part, from our share repurchase activity and financing for acquisitions completed throughout 2018.2020.
Income Tax Provision (Benefit) Provision
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| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Income tax provision (benefit) | | $ | 12,094 | | | $ | (28,717) | | | (142.1%) | | $ | 13,958 | | | $ | (1,498) | | | (1,031.8%) |
Effective income tax rate | | 29.1 | % | | 8.3 | % | | 20.8 pts. | | (754.1 | %) | | 0.6 | % | | (754.7) pts. |
|
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Income tax (benefit) provision | | $ | (28,717 | ) | | $ | 8,913 |
| | (422.2%) | | $ | (1,498 | ) | | $ | 47,916 |
| | (103.1%) |
Effective income tax rate | | 8.3 | % | | (40.2 | %) | | 48.5 pts. | | 0.6 | % | | 34.1 | % | | (33.5) pts. |
The changesincrease in our effective income tax rate for the third quarter and first nine months of 2019, 2020, as compared to the same periods in 2018, were2019, was driven primarily by the impact of the nondeductible portion of the goodwill impairment charges in each period, combined with the impactthird quarter of asset impairment charges on pretax (loss) income in each period. The nondeductible portion of the goodwill impairment charges2019, which resulted in tax expense of $54.2 million in the third quarter ofand lowered our 2019 compared to $15.9 million in the third quarter of 2018. In addition,effective income tax rate by 15.6 points. Also during the third quarter of 2019, we placed a full valuation allowance of $8.4 million on the intangible-related deferred tax asset generated by the impairment of intangible assets located in Australia. This charge lowered our effective income tax rate by 2.4 points in 2019. In addition, our state income tax rate increased as compared to 2019.
Our effective income tax rates for the first nine months of 2020 and 2019 were significantly impacted by the asset impairment charges in both periods, coupled with their impact on the amount of pre-tax loss and the nondeductible portion of the impairment charges. The non-deductible portion of goodwill impairment charges drove a 632.9 point decrease in our tax rate and the tax impact of share-based compensation resulted in a 104.5 point decrease, as compared to the first nine months of 2019. Further information regarding our effective income tax rate for the first nine months of 20192020, as compared to our 20182019 annual effective income tax rate, can be found under the caption: "Note 11:9: Income tax benefit (provision)"Tax Provision" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
Net Income (Loss) / Diluted Earnings (Loss) Per Share
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Net income (loss) | | $ | 29,444 | | | $ | (318,493) | | | (109.2%) | | $ | (15,809) | | | $ | (244,721) | | | (93.5%) |
Diluted earnings (loss) per share | | 0.70 | | | (7.49) | | | (109.3%) | | (0.40) | | | (5.65) | | | (92.9%) |
Adjusted diluted EPS(1) | | 1.47 | | | 1.71 | | | (14.0%) | | 3.70 | | | 4.88 | | | (24.2%) |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Diluted EPS | | $ | (7.49 | ) | | $ | (0.67 | ) | | 1,017.9 | % | | $ | (5.65 | ) | | $ | 1.93 |
| | (392.7 | %) |
Adjusted diluted EPS | | 1.71 |
| | 1.74 |
| | (1.7 | %) | | 4.88 |
| | 5.01 |
| | (2.6 | %) |
(1) See the following Reconciliation of Non-GAAP Financial Measures section, which illustrates how we calculate adjusted diluted EPS.
The increase in net income and diluted EPS for the third quarter of 2020, as compared to 2019, was driven primarily by the asset impairment charges of $391.0 million in the third quarter of 2019, various cost reduction actions taken in 2020 in response to COVID-19, as well as cost reduction actions in 2020 unrelated to our response to the COVID-19 pandemic, primarily in our sales, marketing and fulfillment organizations. Also, interest expense decreased $3.6 million due to lower interest rates and acquisition amortization decreased $2.8 million, driven in part, by previous asset impairment charges. In addition, diluted EPS benefited from lower average shares outstanding in the third quarter of 2020. These factors were partially offset by the negative impact of the COVID-19 pandemic on revenue, various investments in our One Deluxe strategy and the continuing secular decline in checks and forms.
The change in net loss and diluted loss per share for the third quarterfirst nine months of 2019,2020, as compared to the third quarter of 2018,2019, was driven primarily by the $291.8 million increasefactors outlined in asset impairment charges in the third quarter ofExecutive Overview – 2020 results vs. 2019 a $22.6 million increase in restructuring and integration expense in support of our growth strategies and to increase our efficiency, continued volume reductions in checks, forms and accessories and increased information technology costs related to infrastructure investments, as well as an increase in business transformation costs, share-based compensation expense and medical costs. These increases in. In addition, diluted loss per share were partially offset bybenefited from lower average shares outstanding in 2019, benefits from our cost reduction initiatives of approximately $12.0 million, Small Business Services price increases and a $4.0 million decrease in acquisition-related amortization, including the impact of our 2018 acquisitions.
The decrease in diluted EPS for the first nine months of 2019, as compared to2020.
Adjusted EBITDA
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Adjusted EBITDA(1) | | $ | 102,513 | | | $ | 119,336 | | | (14.1%) | | $ | 269,666 | | | $ | 350,530 | | | (23.1%) |
Adjusted EBITDA margin | | 23.3 | % | | 24.2 | % | | (0.9) pts. | | 20.2 | % | | 23.6 | % | | (3.4) pts. |
(1) See the first nine monthsfollowing Reconciliation of 2018, was driven primarily by the $289.7 million increase in asset impairment charges in 2019, a $37.7 million increase in restructuring and integration expense in support of our growth strategies and to increase our efficiency, continued volume reductions in checks, forms and accessories, and the gain on sales of Small Business Services businesses and customer lists of $12.9 million in 2018. Additionally, medical costs increased approximately $11.0 million, interest expense increased $8.3 million, organic web services and treasury management revenue declined, and information technology costs related to infrastructure investments and the Small Business Services commission rate increased. Stock-based compensation increased $5.6 million, driven by an increase in the level of equity awards in 2019, CEO transition costs increased $4.4 million, and check pricing allowances withinNon-GAAP Financial Services continued. These decreases in diluted EPS were partially offset by lower shares outstanding in 2019, benefits from our cost reduction initiatives of approximately $35.0 million, the benefit of Small Business Services price increases and incremental earnings from businesses acquired in 2018.Measures section, which illustrates how we calculate adjusted EBITDA.
The decreases in adjusted diluted EPSAdjusted EBITDA decreased for the third quarter and first nine months of 2019,2020, as compared to the same periods in 2018, were2019, driven primarily by the continuing decline inimpacts of the COVID-19 pandemic. In addition, adjusted EBITDA was negatively impacted by mix changes resulting from the contraction of legacy products and services, primarily checks and forms, and accessories, increased medical coststhe loss of web hosting revenue in the third
quarter of 2019. During both periods, we also continued to advance our transformation in line with our One Deluxe strategy by investing in various activities such as transforming our brand and interest expense, lower organic web servicesour website and treasury management revenue, increased information technologyexpanding our sales capabilities, as well as ongoing new costs related to infrastructuresoftware-as-a-service solutions we are employing throughout the company. We also incurred expenses related to treasury management deals signed in the fourth quarter of 2019, as well as investments a higher average Small Business Services commission rate, continued check pricing allowances within Financial Servicesin our client operations area that included human capital investments and increased materialother costs related to on-boarding new clients. Additionally, during the first nine months of 2020, we incurred incremental costs resulting from COVID-19 of approximately $7.0 million, and shipping rates.we recorded bad debt expense of $5.6 million related to notes receivable from our Safeguard distributors. These decreases in adjusted diluted EPSEBITDA were partially offset by lower shares outstandingactions taken to reduce costs in 2019, benefitsline with the reduced revenue, including savings of approximately $10.0 million for the third quarter of 2020 and $25.0 million for the first nine months of 2020 from the temporary salary reductions, suspension of the 401(k) plan employer matching contribution, furloughs and other actions. In addition, we realized the benefit of various cost reductions unrelated to our response to the COVID-19 pandemic, primarily in our sales, marketing and fulfillment organizations, as we continue to develop our post-COVID-19 operating model.
Reconciliation of Non-GAAP Financial Measures
Free cash flow – We believe that free cash flow is an important indicator of cash available for debt service and for shareholders, after making capital investments to maintain or expand our asset base. Free cash flow is limited and not all of our free cash flow is available for discretionary spending, as we may have mandatory debt payments and other cash requirements that must be deducted from our costcash available for future use. We believe that the measure of free cash flow provides an additional metric to compare cash generated by operations on a consistent basis and to provide insight into the cash flow available to fund items such as share repurchases, dividends, mandatory and discretionary debt reduction initiatives, Small Business Services price increases and incremental earningsacquisitions or other strategic investments.
Net cash provided by operating activities reconciles to free cash flow as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 |
Net cash provided by operating activities | | $ | 166,811 | | | $ | 208,024 | |
Purchases of capital assets | | (42,707) | | | (49,679) | |
Free cash flow | | $ | 124,104 | | | $ | 158,345 | |
Net debt – Management believes that net debt is an important measure to monitor leverage and to evaluate the balance sheet. In calculating net debt, cash and cash equivalents are subtracted from businesses acquired in 2018.total debt because they could be used to reduce our debt obligations. A limitation associated with using net debt is that it subtracts cash and cash equivalents, and therefore, may imply that management intends to use cash and cash equivalents to reduce outstanding debt and that there is less debt than the most comparable GAAP measure indicates.
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | September 30, 2020 | | December 31, 2019 |
Total debt | | $ | 1,040,000 | | | $ | 883,500 | |
Cash and cash equivalents | | (310,430) | | | (73,620) | |
Net debt | | $ | 729,570 | | | $ | 809,880 | |
Non-GAAP Financial Measure
WeAdjusted diluted EPS – By excluding the impact of non-cash items or items that we believe are not indicative of ongoing operations, we believe that adjusted diluted EPS provides useful comparable information for investors by excludingto assist in analyzing our current period operating performance and in assessing our future operating performance. As such, adjusted diluted EPS is one of the impactkey financial performance metrics we use to assess the operating results and performance of items that we believe are not indicative of ongoing operations.the business and to identify strategies to improve performance. It is reasonable to expect that one or more of thesethe excluded items will occur in future periods, but the amounts recognized willmay vary significantly.
Diluted EPSearnings (loss) per share reconciles to adjusted diluted EPS as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) | | $ | 29,444 | | | $ | (318,493) | | | $ | (15,809) | | | $ | (244,721) | |
Net income attributable to non-controlling interest | | (27) | | | — | | | (46) | | | — | |
Net income (loss) attributable to Deluxe | | 29,417 | | | (318,493) | | | (15,855) | | | (244,721) | |
Asset impairment charges | | 2,760 | | | 390,980 | | | 97,973 | | | 390,980 | |
Acquisition amortization | | 13,618 | | | 16,372 | | | 42,031 | | | 54,229 | |
Restructuring, integration and other costs | | 18,941 | | | 29,723 | | | 59,064 | | | 53,699 | |
CEO transition costs(1) | | — | | | 1,145 | | | 10 | | | 8,539 | |
Share-based compensation | | 6,240 | | | 5,356 | | | 15,335 | | | 14,016 | |
Acquisition transaction costs | | — | | | 13 | | | 9 | | | 193 | |
Certain legal-related expense | | — | | | — | | | (2,165) | | | 6,417 | |
Loss on sales of customer lists | | — | | | 125 | | | 18 | | | 224 | |
Adjustments, pre-tax | | 41,559 | | | 443,714 | | | 212,275 | | | 528,297 | |
Income tax provision impact of pre-tax adjustments(2) | | (9,396) | | | (52,437) | | | (39,739) | | | (71,280) | |
Adjustments, net of tax | | 32,163 | | | 391,277 | | | 172,536 | | | 457,017 | |
Adjusted net income attributable to Deluxe | | 61,580 | | | 72,784 | | | 156,681 | | | 212,296 | |
Income allocated to participating securities | | — | | | (136) | | | (77) | | | (266) | |
Re-measurement of share-based awards classified as liabilities | | 60 | | | 132 | | | (803) | | | 88 | |
Adjusted income attributable to Deluxe available to common shareholders | | $ | 61,640 | | | $ | 72,780 | | | $ | 155,801 | | | $ | 212,118 | |
| | | | | | | | |
Weighted average shares and potential common shares outstanding | | 41,991 | | | 42,533 | | | 41,967 | | | 43,312 | |
Adjustment(3) | | 42 | | | 120 | | | 127 | | | 125 | |
Adjusted weighted average shares and potential common shares outstanding | | 42,033 | | | 42,653 | | | 42,094 | | | 43,437 | |
| | | | | | | | |
GAAP diluted earnings (loss) per share | | $ | 0.70 | | | $ | (7.49) | | | $ | (0.40) | | | $ | (5.65) | |
Adjustments, net of tax | | 0.77 | | | 9.20 | | | 4.10 | | | 10.53 | |
Adjusted diluted EPS | | $ | 1.47 | | | $ | 1.71 | | | $ | 3.70 | | | $ | 4.88 | |
(1) In 2019, includes adjustments to share-based compensation expense related to the modification of certain awards in conjunction with our CEO transition.
(2) The tax effect of the pre-tax adjustments considers the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). Generally, this results in a tax impact that approximates the U.S. effective tax rate for each adjustment. However, the tax impact of certain adjustments, such as asset impairment charges, share-based compensation expense and CEO transition costs, depends on whether the amounts are deductible in the respective tax jurisdictions and the applicable effective tax rate(s) in those jurisdictions.
(3) The total of weighted-average shares and potential common shares outstanding used in the calculations of adjusted diluted EPS is higher than that used in the GAAP calculations, as certain stock-based compensation awards were excluded from the GAAP calculations because their effect was antidilutive.
Adjusted EBITDA – We believe that adjusted EBITDA is useful in evaluating our operating performance, as the calculation eliminates the effect of interest expense, income taxes, the accounting effects of capital investments (i.e., depreciation and amortization) and certain items, as presented below, that may vary for companies for reasons unrelated to overall operating performance. In addition, management utilizes adjusted EBITDA to assess the operating results and performance of the business, to perform analytical comparisons and to identify strategies to improve performance. We also believe that an increasing adjusted EBITDA depicts an increase in the value of the company. We do not consider adjusted EBITDA to be a measure of cash flow, as it does not consider certain cash requirements such as interest, income taxes, debt service payments or capital investments.
|
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, | | Year Ended December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2018 |
Diluted EPS | | $ | (7.49 | ) | | $ | (0.67 | ) | | $ | (5.65 | ) | | $ | 1.93 |
| | $ | 3.16 |
|
Asset impairment charges | | 8.06 |
| | 1.93 |
| | 7.92 |
| | 1.95 |
| | 1.96 |
|
Acquisition amortization | | 0.49 |
| | 0.33 |
| | 1.13 |
| | 0.88 |
| | 1.23 |
|
Restructuring, integration and other costs | | 0.53 |
| | 0.09 |
| | 0.93 |
| | 0.22 |
| | 0.34 |
|
CEO transition costs | | 0.02 |
| | 0.04 |
| | 0.15 |
| | 0.07 |
| | 0.11 |
|
Share-based compensation | | 0.10 |
| | 0.05 |
| | 0.29 |
| | 0.16 |
| | 0.21 |
|
Certain legal-related expense | | — |
| | 0.03 |
| | 0.11 |
| | 0.03 |
| | 0.15 |
|
Acquisition transaction costs | | — |
| | — |
| | — |
| | 0.01 |
| | 0.02 |
|
Gain on sales of businesses and customer lists | | — |
| | (0.03 | ) | | — |
| | (0.22 | ) | | (0.27 | ) |
Loss on debt retirement | | — |
| | — |
| | — |
| | 0.01 |
| | 0.01 |
|
Impact of federal tax reform | | — |
| | (0.03 | ) | | — |
| | (0.03 | ) | | (0.04 | ) |
Adjusted diluted EPS | | $ | 1.71 |
| | $ | 1.74 |
| | $ | 4.88 |
| | $ | 5.01 |
| | $ | 6.88 |
|
Net income (loss) reconciles to adjusted EBITDA as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) | | $ | 29,444 | | | $ | (318,493) | | | $ | (15,809) | | | $ | (244,721) | |
Pre-tax income attributable to non-controlling interest | | (21) | | | — | | | (46) | | | — | |
Depreciation and amortization expense | | 27,972 | | | 30,494 | | | 83,065 | | | 95,430 | |
Interest expense | | 5,083 | | | 8,710 | | | 18,254 | | | 27,251 | |
Income tax provision (benefit) | | 12,094 | | | (28,717) | | | 13,958 | | | (1,498) | |
Asset impairment charges | | 2,760 | | | 390,980 | | | 97,973 | | | 390,980 | |
Restructuring, integration and other costs | | 18,941 | | | 29,723 | | | 59,064 | | | 53,699 | |
CEO transition costs(1) | | — | | | 1,145 | | | 10 | | | 8,539 | |
Share-based compensation expense | | 6,240 | | | 5,356 | | | 15,335 | | | 14,016 | |
Acquisition transaction costs | | — | | | 13 | | | 9 | | | 193 | |
Certain legal-related expense | | — | | | — | | | (2,165) | | | 6,417 | |
Loss on sales of customer lists | | — | | | 125 | | | 18 | | | 224 | |
Adjusted EBITDA | | $ | 102,513 | | | $ | 119,336 | | | $ | 269,666 | | | $ | 350,530 | |
Note that
(1) In 2019, includes adjustments to share-based compensation expense related to the modification of certain awards in conjunction with our CEO transition.
Although we provided a high-level outlook for adjusted EBITDA margin for the fourth quarter of 2020 under Executive Overview, we have not reconciled adjusted diluted EPS outlook guidance for full year 2019this information to diluted EPSthe directly comparable GAAP financial measure because we do not provide outlook guidance on diluted EPSfor net income or the reconciling items between diluted EPSnet income and this non-GAAP financial measure.adjusted EBITDA. Because of the substantial uncertainty and variability surrounding certain of these forward-looking reconciling items, including asset impairment charges, restructuring, integration and other costs, and certain legal-related expenses, a reconciliation of the non-GAAP financial measure outlook guidance to the corresponding GAAP measure is not available without unreasonable effort. The probable significance of certain of these items is high and, based on historical experience, could be material.
Liquidity – Management considers liquidity to be an important metric for demonstrating the amount of cash that is available or that could be readily available on short notice. This financial measure is not a substitute for GAAP liquidity measures. Instead, management believes that this measurement enhances investors’ understanding of the funds that are currently available to us.
| | | | | | | | |
(in thousands) | | September 30, 2020 |
Cash and cash equivalents | | $ | 310,430 | |
Amounts available for borrowing under revolving credit facility | | 102,572 | |
Liquidity | | $ | 413,002 | |
RESTRUCTURING, INTEGRATION AND OTHER COSTS
| | |
RESTRUCTURING, INTEGRATION AND OTHER COSTS |
Restructuring and integration expense consistedconsists of costs related to the integration of acquired businesses into our systems and processes. It also includes costs related to the consolidation and migration of certain applications and processes, including our financial, sales and human resources management systemsystems. It also includes costs related to the integration of acquired businesses into our systems and certainprocesses and the rationalization of our sales and financial systems.real estate footprint. These costs primarily consistedconsist of information technology consulting, and project management services and internal labor, as well as other miscellaneous costs associated with our initiatives, such as training, travel and travel.relocation. In addition, we recorded employee severance costs related to these initiatives, as well as our ongoing cost reduction initiatives, primarily within our sales, marketing and fulfillment functions.across functional areas. Our restructuring and integration activities have increased inbegan to increase during the second half of 2019, as we are currentlybegan pursuing several initiatives designed to focus our business behind our growth strategiesstrategy and to increase our efficiency. Further information regarding restructuring and integration expense can be found under the caption "Note 9:8: Restructuring and integration expense"Integration Expense" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. In addition to restructuring and integration expense, we also recognized certain business transformation
expenses costs related to optimizing our business processes in line with our growth strategies. These costs totaled $2.0 million for the third quarter of 2019 and $2.2 million forWhile we reduced certain expenditures during the first nine monthshalf of 2019.2020 in
response to the COVID-19 pandemic, in July 2020, we made the decision to selectively resume certain capital projects and to continue important systems implementation work.
The majority of the employee reductions included in our restructuring and integration accruals are expected to be completed in 2019,by the first quarter of 2021, and we expect most of the related severance payments to be paid by mid-2020.in the first half of 2021. As a result of our employee reductions, we expect to realize cost savings of approximately $2.5$17.0 million in SG&A expense and $3.0 million in total cost of revenue and $15.0 million in SG&A expense in 2019, in comparison2020, compared to our 20182019 results of operations, whichoperations. This represents a portion of the total net cost reductions we expect to realize in 2019.2020.
In April 2018,For many years, we announcedoperated 3 reportable business segments: Small Business Services, Financial Services and Direct Checks. These segments were generally organized by customer type and reflected the retirement of Lee Schram,way we managed the company. Effective January 1, 2020, we reorganized our former CEO. Mr. Schram remained employed under the terms of a transition agreement through March 1, 2019. Under the terms of this agreement, we provided certain benefitsreportable business segments to Mr. Schram, including a transition bonusalign with structural and management reporting changes in the amount of $2.0 million that was paid in March 2019. In addition, modifications were made to certain of his share-based payment awards. In conjunction with the CEO transition, we offered retention agreements to certain memberssupport of our management team under which each employee is 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 duringgrowth strategy. We now operate 4 reportable segments: Payments, Cloud Solutions, Promotional Solutions and Checks. These segments are generally organized by product type and reflect the retention period, generally from July 1, 2018 to December 31, 2019, and complies with certain covenants. In addition to these expenses,way we incurred certain other costs related tocurrently manage the CEO transition process, including executive search, legal, travel and board of directors fees in 2018. During the first nine months of 2019, we incurred consulting fees related to the evaluation of our strategic plan and we expensed the majority of the current CEO's signing bonus. CEO transition costs are included in SG&A expense on the consolidated statements of comprehensive (loss) income and were $1.1 million for the third quarter of 2019, $2.6 million for the third quarter of 2018, $8.5 million for the first nine months of 2019 and $4.2 million for the first nine months of 2018. We estimate that these costs will total approximately $9.0 million for 2019, compared to $7.2 million for 2018. We anticipate that the remaining management retention bonuses will be paid in the first quarter of 2020. Accruals for CEO transition costs were included within accrued liabilities on the consolidated balance sheet and were $3.9 million as of September 30, 2019.
SEGMENT RESULTS
Additionalcompany. The financial information regardingpresented below for our reportable business segments appearsis consistent with that presented under the caption “Note 17:"Note 14: Business segment information”Segment Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.report, where information regarding our product and service offerings can also be found.
Small Business ServicesPayments
Results for our Small Business ServicesPayments segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Total revenue | | $ | 74,675 | | | $ | 64,634 | | | 15.5% | | $ | 223,886 | | | $ | 193,888 | | | 15.5% |
Adjusted EBITDA | | 16,746 | | | 17,199 | | | (2.6%) | | 50,352 | | | 52,037 | | | (3.2%) |
Adjusted EBITDA margin | | 22.4 | % | | 26.6 | % | | (4.2) pts. | | 22.5 | % | | 26.8 | % | | (4.3) pts. |
|
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Total revenue | | $ | 310,211 |
| | $ | 315,599 |
| | (1.7%) | | $ | 931,771 |
| | $ | 949,655 |
| | (1.9%) |
Operating (loss) income | | (243,193 | ) | | (45,254 | ) | | 437.4% | | (163,805 | ) | | 72,288 |
| | (326.6%) |
Operating margin | | (78.4 | %) | | (14.3 | %) | | (64.1) pts. | | (17.6 | %) | | 7.6 | % | | (25.2) pts. |
The decrease in total revenue for the third quarter of 2019, as compared to the third quarter of 2018, was driven by lower order volume, primarily related to checks, forms and accessories, as secular check and forms usage continues to decline. In addition, web services volume decreased approximately $2.0 million, excluding the effect of a 2018 acquisition, due primarily to a reduction in search and email marketing volume. These decreases in revenue were partially offset by the benefit of price increases and revenue of approximately $4.0 million due to one additional business day in 2019, as well as incremental revenue of approximately $1.8 million from the acquisition of My Corporation Business Services, Inc. in December 2018. Information about this acquisition can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.
The decrease in total revenue for the first nine months of 2019, as compared to the first nine months of 2018, was driven by lower order volume, primarily related to checks, forms and accessories, as secular check and forms usage continues to decline. Web services volume also decreased approximately $6.0 million, excluding the effect of 2018 acquisitions, due
primarily to a reduction in search and email marketing and web hosting volume. In addition, revenue was negatively impacted $4.0 million by foreign currency exchange rate changes. These decreases in revenue were partially offset by incremental revenue of approximately $14.7 million from businesses acquired in 2018, as well as the benefit of price increases. Information about our acquisitions can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.
The increase in operating loss for the third quarter of 2019, as compared to the third quarter of 2018, was driven primarily by an increase in asset impairment charges of $176.3 million and a $16.6 million increase in restructuring and integration expense in support of our growth strategies and to increase our efficiency, as well as the lower order volume for checks, forms and accessories. Further information regarding the asset impairment charges can be found in Critical Accounting Policies. In addition, medical costs and material and shipping rates increased in 2019. Also, during the third quarter of 2018, we recognized gains from sales of businesses and customer lists of $1.8 million. Partially offsetting these increases in operating loss were price increases and benefits of our cost reduction initiatives.
The increase in operating loss for the first nine months of 2019, as compared to the first nine months of 2018, was driven primarily by an increase in asset impairment charges of $174.1 million and a $27.7 million increase in restructuring and integration expense in support of our growth strategies and to increase our efficiency, as well as the lower order volume for checks, forms and accessories and an increase in the average commission rate. Further information regarding the asset impairment charges can be found in Critical Accounting Policies. In addition, CEO transition costs allocated to this segment increased $2.4 million, share-based compensation expense increased, driven by an increase in the level of equity awards in 2019, and medical costs and material and shipping rates all increased in 2019. Also, during the first nine months of 2018, we recognized gains from sales of businesses and customer lists of $12.9 million. Partially offsetting these increases in operating loss were price increases and benefits of our cost reduction initiatives.
Financial Services
Results for our Financial Services segment were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Total revenue | | $ | 154,599 |
| | $ | 146,771 |
| | 5.3% | | $ | 465,086 |
| | $ | 426,727 |
| | 9.0% |
Operating (loss) income | | (105,691 | ) | | 17,612 |
| | (700.1%) | | (86,134 | ) | | 49,565 |
| | (273.8%) |
Operating margin | | (68.4 | %) | | 12.0 | % | | (80.4) pts. | | (18.5 | %) | | 11.6 | % | | (30.1) pts. |
The increase in total revenue for the third quarter and first nine months of 2019,2020, as compared to the same periods2019, were driven primarily by an increase in 2018, was driven by incremental treasury management revenue from the acquisition of REMITCO LLC in August 2018 of approximately $9.5 million20.9% for the third quarter of 20192020 and $47.5 million22.1% for the first nine months of 2019.2020, related to lockbox processing outsourcing deals signed in the fourth quarter of 2019 and other client wins. Partially offsetting this increase in revenue,these increases was a decrease in treasury management volumepayroll services revenue, driven by the negative impact of approximately $4.0 millionthe COVID-19 pandemic on our small business customers. We expect revenue In the fourth quarter of 2020 to grow sequentially from the third quarter of 2020, but to temporarily slow to low- to mid-single-digit growth on a year-over-year percentage basis, due primarily to expected customer implementation delays, which may be attributable to the COVID-19 pandemic.
The decreases in adjusted EBITDA for the third quarter and first nine months of 2020, as compared to 2019, excluding the incremental revenue from the acquisition, due to a customer electing to bring its services in-house, as well as a reductionwere driven by increased costs in software maintenance revenue. In addition, revenue was negatively affected by lower check order volume, due primarilysupport of our One Deluxe strategy, including costs related to the continued secular declinelockbox processing outsourcing deals signed in check usage, as well as continued check pricing allowances.
The increase in operating loss for the thirdfourth quarter of 2019, as compared to the third quarter of 2018, was primarily due to a $115.5 million increase in asset impairment charges in 2019 and a $4.6 million increase in restructuring and integration expense in support of our growth strategies and to increase our efficiency, as well as increased information technologyinvestments in our client operations area that included human capital investments and other costs related to infrastructure investments, lower check order volume and continued check pricing allowances. Further information regarding the asset impairment charges can be found in Critical Accounting Policies. In addition, medical costs and material and shipping rates increased in 2019.on-boarding new clients. Partially offsetting these increasesdecreases in operating lossadjusted EBITDA was the revenue generated by the lockbox processing outsourcing deals. The impact of COVID-19 on this segment was minimal, as our Hero Pay premium and the lost revenue were benefits of our continuing cost reduction initiatives.
The increasesubstantially offset by actions taken to reduce costs in operating loss for the first nine months of 2019, as comparedresponse to the first nine monthspandemic. Adjusted EBITDA margin decreased for both periods as a result of 2018, was primarilythe investments in this business, and we expect some compression of EBITDA margin in the fourth quarter of 2020, due to a $115.5 million increase in asset impairment charges in 2019, a $7.4 million increase in restructuring and integration expense in support of our growth strategies and to increase our efficiency, a $5.0 million increase in legal-related expenses in 2019, increased information technology costs related to infrastructure investments, lower check order volume and continued check pricing allowances. Further information regarding the asset impairment charges can be found in expected customer implementation delays.
Critical Accounting Policies. In addition, share-based compensation expense increased, driven by an increase in the level of equity awards in 2019, and medical costs and material and shipping rates increased in 2019. Also, CEO transition costs allocated to this segment increased $1.9 million in 2019. Partially offsetting these increases in operating loss were benefits of our
Cloud Solutions
continuing cost reduction initiatives and a contribution of approximately $4.4 million from the REMITCO LLC acquisition, including acquisition amortization.
Direct Checks
Results for our Direct ChecksCloud Solutions segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Total revenue | | $ | 63,758 | | | $ | 79,976 | | | (20.3%) | | $ | 193,600 | | | $ | 237,178 | | | (18.4%) |
Adjusted EBITDA | | 16,425 | | | 20,216 | | | (18.8%) | | 45,494 | | | 56,362 | | | (19.3%) |
Adjusted EBITDA margin | | 25.8 | % | | 25.3 | % | | 0.5 pts. | | 23.5 | % | | 23.8 | % | | (0.3) pts. |
|
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Total revenue | | $ | 28,783 |
| | $ | 30,820 |
| | (6.6%) | | $ | 89,788 |
| | $ | 96,967 |
| | (7.4%) |
Operating income | | 8,201 |
| | 10,360 |
| | (20.8%) | | 24,853 |
| | 31,396 |
| | (20.8%) |
Operating margin | | 28.5 | % | | 33.6 | % | | (5.1) pts. | | 27.7 | % | | 32.4 | % | | (4.7) pts. |
The decreasedecreases in total revenue for the third quarter and first nine months of 2020, as compared to 2019, were driven by the impact of the COVID-19 pandemic, primarily in data-driven marketing solutions as clients suspended their marketing campaigns, with some impact on web hosting revenue as well. Data-driven marketing revenue for the third quarter of 2020 increased 57.1% over the second quarter of 2020, as financial institutions slowly reactivated data-driven marketing analytics and campaigns. Web hosting revenue declined for both the third quarter and first nine months of 2020, as compared to 2019, due to our decision in the third quarter of 2019 to exit certain customer contracts, the loss of certain large customers in the third quarter of 2019 as they elected to in-source some of the services we provide, previous under-investment in this business and more recent decisions to exit certain product lines. Impacting the nine-month period, data-driven marketing revenue increased approximately $7.0 million in the first quarter of 2020, prior to the commencement of the COVID-19 pandemic, driven by new campaigns and growth in pay-for-performance marketing campaigns. We anticipate that Cloud Solutions revenue will decline in the fourth quarter of 2020, as compared to the same periods in 2018, was primarilythird quarter of 2020, due to the reduction in orders stemming from the continued secular decline in check usage. In addition, revenue per order was slightly lower in each period driven by unfavorable order channel mixour recent decisions to exit certain product lines and lower fraud services revenue.a second COVID-19 wave.
The decreases in operating income and operating marginAdjusted EBITDA for the third quarter and first nine months of 2019,2020, as compared to the same periods in 2018,2019, were primarily due primarily to the impact of COVID-19, increased information technology costs in support of our One Deluxe strategy and the loss of web hosting and data-driven marketing revenue decline, increased medicalrelated to the events that occurred in the third quarter of 2019. Partially offsetting these declines in adjusted EBITDA were various cost reductions unrelated to our response to the COVID-19 pandemic, primarily sales and marketing costs, and increased material and shipping ratesthe benefit of actions taken in 2019. In addition, restructuring and integration expenseresponse to COVID-19. For the nine-month period, adjusted EBITDA also benefited from the increase in data-driven marketing revenue in the first quarter, prior to the commencement of the COVID-19 pandemic. Adjusted EBITDA margin increased $1.4 million for the third quarter of 2020, as compared to 2019, as the cost reductions outpaced the revenue decline, and $2.5 millionrevenue mix was more favorable in 2020. Adjusted EBITDA margin for the first nine months of 2020, as compared to 2019, declined slightly due to the mix of data-driven marketing campaigns in the first quarter of 2020. We expect adjusted EBITDA margin to remain in the low-to-mid 20% range.
Promotional Solutions
Results for our Promotional Solutions segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Total revenue | | $ | 124,929 | | | $ | 156,835 | | | (20.3%) | | $ | 385,667 | | | $ | 468,209 | | | (17.6%) |
Adjusted EBITDA | | 21,478 | | | 22,909 | | | (6.2%) | | 46,529 | | | 68,787 | | | (32.4%) |
Adjusted EBITDA margin | | 17.2 | % | | 14.6 | % | | 2.6 pts. | | 12.1 | % | | 14.7 | % | | (2.6) pts. |
The decreases in total revenue for the third quarter and first nine months of 2020, as compared to 2019, were driven primarily by the impact of the COVID-19 pandemic, as our small business and enterprise customers struggle in the current economic environment and demand for promotional products declined sharply, as our customers stopped virtually all promotional activities in response to the pandemic. The continuing secular decline in business forms and some accessories also negatively impacted revenue in each period. Partially offsetting these volume declines was new revenue of $29.5 million from sales of PPE during the first nine months of 2020, primarily in the second quarter. Revenue for the third quarter of 2020 increased 5.9% over the second quarter of 2020. While we did not repeat the $26.0 million of PPE revenue that we realized in the second quarter, volume in our business essentials area did increase sequentially, including forms, deposit slips, envelopes and other supplies. Looking to the fourth quarter of 2020, we have taken steps to size our operations in line with current volumes, but we are prepared to ramp up our operations as the economy recovers.
The decreases in Adjusted EBITDA for the third quarter and first nine months of 2020, as compared to 2019, were primarily driven by the loss of revenue resulting from the COVID-19 pandemic, investments in support of our growth strategiesOne Deluxe strategy, primarily information technology and sales force expenses, and the continuing secular decline in forms and some accessories. In addition, we recorded bad debt expense of $5.6 million during the first nine months of 2020, related to increasenotes receivable from our efficiency.Safeguard distributors, primarily one that was underperforming prior to the commencement of the COVID-19 pandemic. These decreases in operating income and operating marginadjusted EBITDA were partially offset by benefitsthe benefit of actions taken in response to COVID-19, various cost reductions unrelated to our response to the COVID-19 pandemic, primarily sales, marketing and fulfillment costs, and the sales of PPE in 2020. Adjusted EBITDA margin for the third quarter of 2020 improved 260 basis points as compared to 2019, as the mix of business continued to evolve and we benefited from cost saving initiatives. Adjusted EBITDA margin for the first nine months of 2020 decreased 260 basis points as compared to 2019, as the revenue decline, bad debt expense and investments in our transformation more than offset the benefit of actions taken in response to COVID-19 and the other cost reduction initiatives, includingsavings realized during the period.
Checks
Results for our Checks segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Total revenue | | $ | 176,099 | | | $ | 192,148 | | | (8.4%) | | $ | 533,135 | | | $ | 587,370 | | | (9.2%) |
Adjusted EBITDA | | 84,954 | | | 98,782 | | | (14.0%) | | 258,392 | | | 300,887 | | | (14.1%) |
Adjusted EBITDA margin | | 48.2 | % | | 51.4 | % | | (3.2) pts. | | 48.5 | % | | 51.2 | % | | (2.7) pts. |
The decreases in total revenue for the third quarter and first nine months of 2020, as compared to 2019, were driven primarily by the impact of the COVID-19 pandemic, which resulted in a decline in business check usage stemming from the slow-down in the economy. Personal check volumes also slowed at a somewhat lesser rate. The continuing secular decline in checks also contributed to the decrease. We believe the secular decline in volume sequentially improved during the third quarter of 2020, likely benefiting from some delayed second quarter volume. We expect the revenue recovery to be slightly lower advertising expensein the fourth quarter of 2020, as compared to the third quarter, and we expect check volumes to return to traditional secular trends with the overall recovery in the economy.
The decreases in Adjusted EBITDA for the third quarter and first nine months of 2020, as compared to 2019, were driven by advertising print reduction initiatives.
CASH FLOWS AND LIQUIDITY
the loss of revenue resulting from the COVID-19 pandemic and the secular decline in checks, as well as a higher commission rate on key customer referrals and investments in support of our One Deluxe strategy, primarily information technology expenses. Partially offsetting these decreases in adjusted EBITDA were various cost reductions unrelated to our response to the COVID-19 pandemic, primarily sales, marketing and fulfillment costs, and the benefit of actions taken in response to COVID-19. We continue to focus on scaling our plant operating expenses to match current check volumes.
As of September 30, 2019,2020, we held cash and cash equivalents of $73.5$310.4 million,, as well as restricted cash and restricted cash equivalents included in funds held for customers of $78.6$89.6 million. The following table shows our cash flow activity for the nine months ended September 30, 20192020 and 2018,2019, and should be read in conjunction with the consolidated statements of cash flows appearing in Part I, Item 1 of this report.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Nine Months Ended September 30, |
(in thousands) | | | | | | | | 2020 | | 2019 | | Change |
Net cash provided by operating activities | | | | | | | | $ | 166,811 | | | $ | 208,024 | | | $ | (41,213) | |
Net cash used by investing activities | | | | | | | | (31,668) | | | (46,532) | | | 14,864 | |
Net cash provided (used) by financing activities | | | | | | | | 93,359 | | | (157,244) | | | 250,603 | |
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | | | | | | | | (3,297) | | | 2,604 | | | (5,901) | |
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | | | | | | | $ | 225,205 | | | $ | 6,852 | | | $ | 218,353 | |
Free cash flow(1) | | | | | | | | $ | 124,104 | | | $ | 158,345 | | | $ | (34,241) | |
(1) See the Reconciliation of Non-GAAP Financial Measures within the Consolidated Results of Operations section, which illustrates how we calculate free cash flow. |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change |
Net cash provided by operating activities | | $ | 208,024 |
| | $ | 219,102 |
| | $ | (11,078 | ) |
Net cash used by investing activities | | (49,879 | ) | | (231,924 | ) | | 182,045 |
|
Net cash (used) provided by financing activities | | (153,897 | ) | | 12,563 |
| | (166,460 | ) |
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | | 2,604 |
| | (2,446 | ) | | 5,050 |
|
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | $ | 6,852 |
| | $ | (2,705 | ) |
| $ | 9,557 |
|
The $11.1 million decreaseTo maintain liquidity as we were impacted by the COVID-19 pandemic, we took steps to reduce discretionary spending and other expenditures in netline with revenue declines. These steps included temporary salary reductions for all salaried employees, including our leadership team and board of directors, project delays, furloughs and other actions. We also delayed U.S. federal payroll tax payments under the CARES Act. As a result of these actions and our stronger than expected performance, free cash provided by operating activitiesflow for the first nine months of 2019,2020 was $124.1 million, as compared to $158.3 million for the first nine months of 2018, was due2019. This allowed us to end the temporary salary reductions, effective July 1, 2020. In addition, we repaid $100.0 million of the amount drawn on our revolving credit facility during July 2020, and in October 2020, we repaid an additional $140.0 million. We ended the third quarter of 2020 with liquidity of $413.0 million, comprised of cash on hand and availability on our credit facility.
Net cash provided by operating activities decreased $41.2 million for the first nine months of 2020, as compared to 2019, driven primarily toby the loss of revenue resulting from COVID-19 pandemic, increased investments in support of our One Deluxe strategy and the continuing secular decline in checkchecks and forms usage, the payment of certain legal-related expenses, including $12.5 million accrued in the prior year and paid in the first quarter of 2019, increased restructuring and integration activities in support of our growth strategies and to increase our efficiency, increased medical costs, an $8.2 million increase in interest payments, and the timing of accounts payable payments.forms. These decreases in operating cash flow were partially offset by a $32.7$29.2 million reduction in income tax payments resulting from lower taxable income, actions taken in response to COVID-19, such as the temporary salary reductions and other actions, a legal-related settlement of $12.5 million in 2019 as well as benefitsthat was accrued in the previous year and delays in U.S. federal payroll tax payments of our cost reduction initiatives,$9.2 million allowed under the timing of accounts receivable collections and annual billings in certain of our businesses, and Small Business Services price increases.CARES Act.
Included in net cash provided by operating activities were the following operating cash outflows:
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change |
Income tax payments | | $ | 47,378 |
| | $ | 80,063 |
| | $ | (32,685 | ) |
Interest payments | | 26,110 |
| | 17,919 |
| | 8,191 |
|
Performance-based compensation payments(1) | | 23,454 |
| | 21,778 |
| | 1,676 |
|
Prepaid product discount payments | | 20,370 |
| | 19,125 |
| | 1,245 |
|
Severance payments | | 6,835 |
| | 5,327 |
| | 1,508 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change |
Prepaid product discount payments | | $ | 24,947 | | | $ | 20,370 | | | $ | 4,577 | |
Performance-based compensation payments(1) | | 20,799 | | | 23,454 | | | (2,655) | |
Income tax payments | | 18,175 | | | 47,378 | | | (29,203) | |
Interest payments | | 17,929 | | | 26,110 | | | (8,181) | |
Severance payments | | 11,985 | | | 6,835 | | | 5,150 | |
(1) Amounts reflect compensation based on total company performance.
Net cash used by investing activities for the first nine months of 20192020 was $182.0$14.9 million lower than the first nine months of 2018,2019, driven primarily by a decreaseproceeds from the sale of $188.8facilities of $9.7 million in payments for acquisitions. We did not complete any acquisitions during the first nine months2020 and a reduction in capital purchases of 2019. Information about our 2018 acquisitions can be found under the caption “Note 6: Acquisitions”$7.0 million in 2020, partly due to project delays earlier in the Notesyear in response to Consolidated Financial Statements appearing in the 2018 Form 10-K.
COVID-19 pandemic.
Net cash usedprovided by financing activities for the first nine months of 20192020 was $166.5$250.6 million higher than the first nine months of 2018,2019, due primarily to a net decreaseincrease in borrowings on long-term debt of $166.4$142.5 million and a net changedecrease in customer funds obligationscommon share repurchases of $8.7$104.5 million. These increasesIn March 2020, in cash used by financing activities were partially offset by a decreaseresponse to the COVID-19 pandemic, we drew an additional $238.0 million on our $1.15 billion revolving credit facility. We repaid $100.0 million of $4.9this amount in July 2020, and we repaid an additional $140.0 million in employee taxes paid forOctober 2020. Also in response to the COVID-19 pandemic, we did not repurchase any of our shares withheld, as fewer stock options were exercised and fewer restricted stock unit awards vested in 2019.during the second or third quarters of 2020.
Significant cash transactions, excluding those related to operating activities, for each period were as follows:
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | Change |
Payments for acquisitions, net of cash acquired(1) | | $ | (1,598 | ) | | $ | (190,396 | ) | | $ | 188,798 |
|
Payments for common shares repurchased | | (118,547 | ) | | (120,000 | ) | | 1,453 |
|
Purchases of capital assets | | (49,679 | ) | | (42,566 | ) | | (7,113 | ) |
Cash dividends paid to shareholders | | (39,068 | ) | | (42,943 | ) | | 3,875 |
|
Net change in customer funds obligations | | (8,711 | ) | | (58 | ) | | (8,653 | ) |
Employee taxes paid for shares withheld | | (3,076 | ) | | (7,969 | ) | | 4,893 |
|
Net change in debt | | 14,000 |
| | 180,361 |
| | (166,361 | ) |
Proceeds from issuing shares under employee plans | | 3,159 |
| | 7,300 |
| | (4,141 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | Change |
Net change in debt | | $ | 156,500 | | | $ | 14,000 | | | $ | 142,500 | |
Proceeds from sale of facilities | | 9,713 | | | — | | | 9,713 | |
Purchases of capital assets | | (42,707) | | | (49,679) | | | 6,972 | |
Cash dividends paid to shareholders | | (38,057) | | | (39,068) | | | 1,011 | |
Payments for common shares repurchased | | (14,000) | | | (118,547) | | | 104,547 | |
Net change in customer funds obligations | | (9,375) | | | (8,711) | | | (664) | |
| | | | | | |
(1)
No acquisitions were completed during the first nine months of 2019. The amount paid in 2019 represents holdback payments for prior year acquisitions.
We continue to anticipate that net cash provided by operating activities will be between $270.0 million and $285.0 million in 2019, compared to $339.3 million in 2018, driven primarily by increased restructuring and integration activities in support of our growth strategies and to increase our efficiency, the continuing secular decline in check and forms usage, the payment of certain legal-related expenses, including $12.5 million accrued in the prior year and paid in the first quarter of 2019, and higher interest payments, partially offset by benefits from our cost savings initiatives and lower income tax payments. We expect that net cash provided by operating activities in 2019, along with availability under our revolving credit facility, will be utilized for capital expenditures of approximately $75.0 million, dividend payments, required interest payments and periodic share repurchases, as well as possible acquisitions. We intend to focus our capital spending on key revenue growth initiatives, investments in sales and financial technology and information technology infrastructure. As of September 30, 2019, $220.3 million was available for borrowing under our revolving credit facility. To the extent we generate excess cash, we expect to opportunistically repurchase common shares and/or reduce the amount outstanding under our credit facility agreement.
As of September 30, 2019,2020, our foreign subsidiaries held cash and cash equivalents of $64.9$89.1 million. 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 our foreign cash and cash equivalents into the United StatesU.S. at one time, we estimate we would incur a foreign withholding tax liability of approximately $3.0$4.0 million.
As of September 30, 2020, $102.6 million was available for borrowing under our $1.15 billion revolving credit facility. Our credit facility includes an accordion feature allowing us, subject to lender consent, to expand the facility to $1.425 billion. We believeanticipate that net cash generated by operating activities,operations, along with the cash and cash equivalents on hand and availability underon our revolving credit facility, will be sufficient to support our operations and to meet our financial commitments for the next 12 months, including capital expendituresmonths. We anticipate that we will continue to pay our regular quarterly dividend. However, dividends are approved by our board of approximately $75.0 million, dividend payments, required interest payments,directors each quarter and periodic share repurchases, as well as possible acquisitions.
CAPITAL RESOURCES
thus, are subject to change.
Our total debt was $924.0$1,040.0 million as of September 30, 2019,2020, an increase of $12.1$156.5 million from December 31, 2018.2019, as we drew an additional amount on our line of credit in response to the COVID-19 pandemic. Further information concerning our outstanding debt can be found under the caption “Note 13:11: Debt” in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
Our capital structure for each period was as follows:
|
| | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 | | |
(in thousands) | | Amount | | Weighted- average interest rate | | Amount | | Weighted- average interest rate | | Change |
Fixed interest rate(1) | | $ | 200,000 |
| | 3.2 | % | | $ | 1,864 |
| | 2.0 | % | | $ | 198,136 |
|
Floating interest rate | | 724,000 |
| | 3.3 | % | | 910,000 |
| | 3.8 | % | | (186,000 | ) |
Total debt | | 924,000 |
| | 3.3 | % | | 911,864 |
| | 3.8 | % | | 12,136 |
|
Shareholders’ equity | | 525,527 |
| | |
| | 915,413 |
| | |
| | (389,886 | ) |
Total capital | | $ | 1,449,527 |
| | |
| | $ | 1,827,277 |
| | |
| | $ | (377,750 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | |
(in thousands) | | Amount | | Weighted- average interest rate | | Amount | | Weighted- average interest rate | | Change |
Fixed interest rate(1) | | $ | 200,000 | | | 3.3 | % | | $ | 200,000 | | | 3.2 | % | | $ | — | |
Floating interest rate | | 840,000 | | | 1.6 | % | | 683,500 | | | 3.0 | % | | 156,500 | |
Total debt | | 1,040,000 | | | 1.9 | % | | 883,500 | | | 3.0 | % | | 156,500 | |
Shareholders’ equity | | 511,444 | | | | | 570,861 | | | | | (59,417) | |
Total capital | | $ | 1,551,444 | | | | | $ | 1,454,361 | | | | | $ | 97,083 | |
(1) The fixed interest rate amount as of September 30, 2019 represents the amount drawn under our revolving credit facility that is subject to an interest rate swap agreement. The related interest rate includes the fixed rate under the swap of 1.798% plus the credit facility spread due on all amounts outstanding under the credit facility agreement. The fixed interest rate amount as of December 31, 2018 represents amounts outstanding under capital lease obligations. Upon adoption of Accounting Standards Update (ASU) No. 2016-02, Leasing, on January 1, 2019, we reclassified our capital lease obligations, now known as finance lease obligations, to accrued liabilities and other non-current liabilities on the consolidated balance sheet.
In October 2018, our board of directors authorized the repurchase of up to $500.0 million of our common stock. This authorization has no expiration date. No shares were repurchased during the second or third quarters of 2020. During the first nine monthsquarter of 2019,2020, we repurchased 2.60.5 million shares for $118.5$14.0 million. As of September 30, 2019, $301.52020, $287.5 million remained available for repurchase under the authorization. Information regarding changes in shareholders' equity can be found in the consolidated statements of shareholders' equity appearing in Part I, Item 1 of this report.
As of December 31, 2018, we had aSeptember 30, 2020, the total availability under our revolving credit facility in the amount of $950.0 million. In January 2019, we increasedwas $1.15 billion. The facility includes an accordion feature allowing us, subject to lender consent, to increase the credit facility by $200.0 million, bringing the total availability to $1.15 billion, subject to increase under the credit agreementcommitment to an aggregate amount not exceeding $1.425 billion. The credit facility matures in March 2023. Our quarterly commitment fee ranges from 0.175% to 0.35%, based on our leverage ratio.
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 requires us to maintain certain financial ratios, including a maximum leverage ratio of 3.5 and a minimum ratio of consolidated earnings before interest and taxes to consolidated interest expense, as defined in the credit agreement, of 3.0. Additionally, the agreement contains customary representations and warranties including, as a condition to borrowing, that all such representations and warranties are true and correct in all material respects on the date of the borrowing, including representations as to no material adverse change in our business, assets, operations or financial condition. We were in compliance with all debt covenants as of September 30, 2019,2020, and we expect toanticipate that we will remain in compliance with allour debt covenants throughout the next 12 months.
As of September 30, 2019,The following table shows amounts were available for borrowing under our revolving credit facility as follows:of September 30, 2020. In July 2020, we repaid $100.0 million of the amount drawn on our revolving credit facility and in October 2020, we repaid an additional $140.0 million. These amounts remain available to us for borrowing.
| | | | | |
(in thousands) | Total available |
Revolving credit facility commitment | $ | 1,150,000 | |
Amount drawn on revolving credit facility | (1,040,000) | |
Outstanding letters of credit(1) | (7,428) | |
Net available for borrowing as of September 30, 2020 | $ | 102,572 | |
|
| | | |
(in thousands) | Total available |
Revolving credit facility commitment | $ | 1,150,000 |
|
Amount drawn on revolving credit facility | (924,000 | ) |
Outstanding letters of credit(1) | (5,733 | ) |
Net available for borrowing as of September 30, 2019 | $ | 220,267 |
|
(1) (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.
OTHER FINANCIAL POSITION INFORMATION
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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 sheetBalance Sheet and cash flow information"Cash Flow Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
Operating lease assets and liabilities – On January 1, 2019, we adopted ASU No. 2016-02, Leasing, and related amendments. Adoption of these standards had a material impact on our consolidated balance sheet, but did not have a significant impact on our consolidated statements of comprehensive loss or our consolidated statement of cash flows. The most significant impact was the recognition of operating lease assets of $50.8 million, current operating lease liabilities of $13.6 million and non-current operating lease liabilities of $37.4 million as of January 1, 2019. Prior periods were not restated upon adoption of these standards. Further information can be found under the caption "Note 2: New accounting pronouncements" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Item 1 of this report.
Prepaid product discounts – Other non-current assets include prepaid product discounts of our Financial Services segment. These coststhat are recorded as non-current assets upon contract execution and are generally amortized on the straight-line basis as reductions of revenue over the related contract term. Changes in prepaid product discounts during the nine months ended September 30, 20192020 and 20182019 can be found under the caption "Note 3: Supplemental balance sheetBalance Sheet and cash flow information"Cash Flow Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. Cash payments for prepaid product discounts were $20.4 million for the first nine months of 2019 and $19.1$24.9 million for the first nine months of 2018.2020 and $20.4 million for the first nine months of 2019.
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 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 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 prepaid product discounts are recorded upon contract execution. These obligations are monitored for each contract and are adjusted as payments are made. Prepaid product discount payments due within the next year are included in accrued liabilities on ourthe consolidated balance sheets. These accruals were $11.2 million as of September 30, 2019 and $10.9$6.0 million as of September 30, 2020 and $14.7 million as of December 31, 2018.2019. Accruals for prepaid product discount payments included in other non-current liabilities on ourthe consolidated balance sheets were $6.9$0.2 million as of September 30, 20192020 and $12.5$3.7 million as of December 31, 20182019.
.
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OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND CONTRACTUAL OBLIGATIONS |
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 indemnification provisions generallyindemnifications 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 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 mattersfees 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. These liabilities were not significant as of September 30, 2020 or December 31, 2019. Further information regarding our environmental liabilities, as well as liabilities related to self-insurance and litigation can be found under the caption “Note 15:12: Other commitmentsCommitments and contingencies”Contingencies” in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in thePart I, 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, weWe have not established any special purpose entities norother than our agreement to form MedPay Exchange LLC (MPX), which delivers payments to healthcare providers from insurance companies and other payers. This entity is a variable interest entity (VIE), as defined in Accounting Standards Codification Topic 810, Consolidation. Further information regarding our accounting for this entity can be found under the caption "Note 1: Consolidated Financial Statements" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. In addition, we did wenot enter into any material related party transactions during the first nine months of 20192020 or during 2018.2019.
A table of our contractual obligations was provided in the MD&A section of the 20182019 Form 10-K. During the first nine months of 2019,2020, amounts drawn under our revolving credit facility increased $156.5 million, as discussed in Capital Resources. We repaid $140.0 million of the amount outstanding on our credit facility in October 2020. In addition, during the third quarter of 2020, we entered into certain software-as-a-serviceexecuted leases on 2 new facilities, located in Georgia and professional services contracts. These contracts require minimum paymentsMinnesota, with terms of $49.86 and 16 years, respectively. As a
result, our total lease obligations increased approximately $65.0 million, with $5.6approximately $5.0 million payabledue in 20192021 - 2022, approximately $13.0 million due in 2023 - 2024, and a totalthe remainder due through 2037. As these leases have not yet commenced, they are not reflected on our consolidated balance sheet as of $33.6 million payable in 2020 and 2021. The remainder is payable through 2024. In addition, in September 2019, we executed an additional professional services contract that requires total minimum payments of approximately $30.0 million. The specific payment terms for this agreement are currently being negotiated, but we expect that this amount will likely be paid through 2026.30, 2020.
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CRITICAL ACCOUNTING POLICIES |
A description of our critical accounting policies was provided in the MD&A section of the 20182019 Form 10-K. There were no changes in these policies during the first nine months of 2019.
2020.
Annual
First quarter 2020 goodwill impairment analysis of goodwill analyses– Our policy onEffective January 1, 2020, we reorganized our reportable business segments to align with structural and management reporting changes in support of our growth strategy. As a result, we reassessed our previously determined reporting units and concluded that a realignment of our reporting units was required. We analyzed goodwill for impairment of indefinite-lived intangibles and goodwill, which is included under the caption "Note 1: Significant accounting policies" in the Notesimmediately prior to Consolidated Financial Statements appearing in the 2018 Form 10-K, explains our methodology for assessing impairment of these assets.
During the third quarter of 2019, we completed the annual impairment analysis of goodwill. We elected to performthis realignment by performing a qualitative analysis for 4all of our reporting units, and a quantitative assessment for 2with the exception of our Direct-to-Consumer reporting units: Financial Services Data-Driven Marketing and Small Business Services Web Services. Financial Services Data-Driven Marketing includesunit, which is part of our businesses that provide outsourced marketing campaign targeting and execution and marketing analytics solutions. Small Business Services Web Services includes our businesses that provide hosting and domain name services, logo and web design, search engine marketing and optimization, payroll services andnew Checks reportable business incorporation and organization services.
segment. 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 analyses 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. The quantitative analysis of our Direct-to-Consumer reporting unit indicated that its fair value exceeded its carrying value by approximately $35.0 million, or 26%.
In completing the realignment of our reporting units, we reallocated the carrying value of goodwill to our new reporting units based on their relative fair values. Immediately subsequent to the realignment, we completed a quantitative analysis for the reporting units that changed as a result of the realignment. This quantitative analysis, as of July 31, 2017, whichJanuary 1, 2020, indicated that the estimated fair values of the 4our reporting units exceeded their carrying values by approximate amounts between $64.0$37.0 million and $1.4 billion,$954.0 million, or by amounts between 50%121% and 314%189% above the carrying values of their net assets.
On January 30, 2020, the World Health Organization (WHO) announced a global health emergency due to an outbreak of COVID-19 originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. Following the pandemic designation, we observed a decline in the market valuation of our common shares and we determined that the global response to the pandemic negatively impacted our estimates of expected future cash flows. After our consideration of economic, market and industry conditions, cost factors, the overall financial performance of our reporting units and the last quantitative analyses we completed, we concluded that a triggering event had occurred for 2 of our reporting units. As such, we completed quantitative goodwill impairment analyses for our Promotional Solutions and Cloud Solutions Web Hosting reporting units as of March 31, 2020. Our analyses indicated that the goodwill of our Promotional Solutions reporting unit was partially impaired and the goodwill of our Cloud Solutions Web Hosting reporting unit was fully impaired. As such, we recorded goodwill impairment charges of $63.4 million and $4.3 million, respectively. The impairment charges were measured as the amount by which the reporting units' carrying values exceeded their estimated fair values, limited to the carrying amount of goodwill. After the impairment charges, $62.8 million of goodwill remained in the Promotional Solutions reporting unit as of the measurement date.
Our impairment analyses were based on assumptions made using the best information available at the time, including the performance of our reporting units subsequent to the WHO declaration of a pandemic and available economic forecasts. These assumptions anticipated a sharp decline in gross domestic product and a material decline in the number of small businesses. We may have not yet experienced the full impact of the pandemic or its resulting impact on our small business customers and thus, actual events may differ from our assumptions. The sweeping nature of the pandemic makes it extremely difficult to predict how our business and operations will be affected in the longer term. To the extent our assumptions differ from actual events, we may be required to record additional asset impairment charges.
Our impairment assessments are sensitive to changes in forecasted revenues and expenses, as well as our selected discount rate. For the Promotional Solutions reporting unit, holding all other assumptions constant, if we assumed revenue in each year was 10% higher than we estimated, our goodwill impairment charge would have been approximately $18.0 million less, and if we assumed revenue in each year was 10% lower than we estimated, our goodwill impairment charge would have been approximately $18.0 million more. If we assumed our expenses, as a percentage of revenue, were 100 basis points lower in each year, our goodwill impairment charge would have been approximately $39.0 million less, and if we assumed our expenses, as a percentage of revenue, were 100 basis points higher in each year, our goodwill impairment charge would have been approximately $39.0 million more. If we assumed our selected discount rate of 12% was 100 basis points lower, our goodwill impairment charge would have been approximately $21.0 million less, and if we assumed the discount rate was 100 basis points higher, our goodwill impairment charge would have been approximately $17.0 million more.
In the case of the Cloud Solutions Web Hosting reporting unit, holding all other assumptions constant, if we assumed revenue in each year was 10% higher than we estimated, our impairment charges, including the impairment of amortizable intangibles, would have been approximately $1.0 million less. If we assumed our expenses, as a percentage of revenue, were 100 basis points lower in each year, our impairment charges, including the impairment of amortizable intangibles, would have been approximately $9.0 million less, and if we assumed our selected discount rate of 9% was 100 basis points lower, our impairment charges, including the impairment of amortizable intangibles, would have been approximately $1.0 million less.
2020 annual impairment analysis– In completing the 2020 annual impairment analysis of goodwill, we elected to perform qualitative analyses for 2 of our reporting units: Payments and Checks. These qualitative analyses evaluated factors, including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the most recent quantitative analyses we completed, which indicated that the estimated fair values of these reporting units exceeded their carrying values by approximately $490.0 million and $955.0 million, or by 189% and 180% above the carrying values of their net assets. In completing these assessments, we noted no changes in events or circumstance that indicated that it was more likely than not that the fair value of anyeither reporting unit was less than its carrying amount.
TheWe elected to perform quantitative analyses as of July 31, 2019for our other 2 reporting units: Cloud Data Analytics and Promotional Solutions. These quantitative analyses indicated that the goodwillestimated fair values of our Financial Services Data-Driven Marketingthese reporting unit was partially impairedunits exceeded their carrying values by approximately $100.0 million and $210.0 million, or by 63% and 132% above the goodwillcarrying values of our Small Business Services Web Services reporting unit was fully impaired.their net assets. As such, we recorded pretaxno goodwill impairment charges were recorded as a result of $115.5 million and $242.3 million, respectively. Bothour annual impairment charges resulted from a combination of triggering events and circumstances, including underperformance against 2019 expectations and the original acquisition business case assumptions, our decision in the third quarter of 2019 to exit certain customer contracts, the loss of certain large customers in the third quarter of 2019 as they elected to in-source some of the services we provide, and the sustained decline in our stock price. Theanalysis. This impairment charges were measured as the amount by which the reporting units' carrying values exceeded their estimated fair values, limited to the carrying amount of goodwill. After the impairment charges, $70.9 million of goodwill remained in the Financial Services Data-Driven Marketing reporting unit.
Our impairment assessments areassessment is sensitive to changes in forecasted revenues and expenses,cash flows, as well as our selected discount rate. For the Financial Services Data-Driven Marketing reporting unit, holding all other assumptions constant, if we
assumed revenue in each year was 10% higher than we estimated, our impairment charge would have been approximately $16.0 million less, and if we assumed revenue in each year was 10% lower than we estimated, our impairment charge would have been approximately $17.0 million more. If we assumed our expenses, as a percentage of revenue, were 200 basis points lower in each year, our impairment charge would have been approximately $28.0 million less, and if we assumed our expenses, as a percentage of revenue, were 200 basis points higher in each year, our impairment charge would have been approximately $30.0 million more. If we assumed our selected discount rate of 12% was 200 basis points lower, our impairment charge would have been approximately $43.0 million less,11%. Changes in the reporting units' forecast assumptions and if we assumedestimates could materially affect the discount rate was 200 basis points higher, our impairment charge would have been approximately $28.0 million more.
In the caseestimation of the Small Business Services Web Services reporting unit, holding all other assumptions constant, if we assumed revenue in each year was 10% higher than we estimated, our impairment charge would have been approximately $6.0 million less. If we assumed our expenses, as a percentage of revenue, were 200 basis points lower in each year, our impairment charge would have been approximately $35.0 million less, and if we assumed our selected discount rate of 12% was 200 basis points lower, our impairment charge would have been approximately $12.0 million less.
Evaluations of asset impairment require us to make assumptions about future events, market conditions and financial performance over the life of the asset being evaluated. These assumptions require significant judgment and actual results may vary from our assumptions. For example, if our stock price were to further decline over a sustained period, if a downturn in economic conditions were to negatively affect our actual and forecasted operating results, if we were to change our business strategies and/or the allocation of resources, if we were to lose significant customers, if competition were to increase, or if order volume declines for checks and forms were to materially accelerate, these situations could indicate a decline in the fair value of one these reporting units.
Risks and uncertainties – The full impact of the COVID-19 pandemic continues to evolve. As such, we are uncertain of the full impact the pandemic will have on our financial condition, liquidity and/or moreresults of operations. This uncertainty affected several of the assumptions made and estimates used in the preparation of our reporting units. This may require us2020 consolidated financial statements. Further information can be found under the caption “Note 15: Risks and Uncertainties” in the Condensed Notes to record additional impairment charges for a portionUnaudited Consolidated Financial Statements appearing in Part I, Item 1 of goodwill or other assets.this report, as well as in Part II, Item 1A of this report.
New accounting pronouncements – Information regarding the accounting pronouncementpronouncements adopted during the first quarternine months of 20192020 and those not yet adopted can be found under the caption “Note 2: New accounting pronouncements”Accounting Pronouncements” in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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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 30, 2019,2020, our total debt was comprised of $924.0 million$1.04 billion drawn under our revolving credit facility at a weighted-average interest rate of 3.3%1.9%. The carryinginterest rate on the majority of the amount reported in the consolidated balance sheets for amounts drawn under our revolving credit facility approximates fair value because our interest rates areis variable and reflectreflects current market rates. As such, the related carrying amount reported on the consolidated balance sheets approximates fair value. Amounts drawn on our revolving credit facility mature in March 2023.
As part of our interest rate risk management strategy, in July 2019, we entered into an interest rate swap, which we designated as a cash flow hedge, to mitigate variability in interest payments on a portion of the amount drawn under our revolving credit facility. The interest rate swap, which terminates in March 2023 when our revolving credit facility matures, effectively converts $200.0 million of variable rate debt to a fixed rate of 1.798%. Changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive loss on the consolidated balance sheetsheets and are subsequently reclassified intoto interest expense as interest payments are made on the variable-rate debt.
The fair value of the interest rate swap was $8.0 million as of September 30, 2020 and $1.5 million as of December 31, 2019 and was included in other non-current liabilities on the consolidated balance sheets.
Based on the daily average amount of outstanding debt, a one percentage point change in our weighted-average interest rates would have resulted in a $5.4$6.3 million change in interest expense for the first nine months of 2019.2020.
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 Canadian and Australian dollars. The effect of exchange rate changes is not expected to have a 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. | | |
ITEM 4. CONTROLS AND PROCEDURES |
(a) Disclosure Controls and Procedures – As of the end of the period covered by this report, September 30, 20192020 (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 were no changes in our internal control over financial reporting identified in connection with our evaluation during the quarter ended September 30, 20192020 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. | | |
ITEM 1. LEGAL PROCEEDINGS |
We record 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 the 20182019 Form 10-K. There have been no significant changes to these risk factors since we filed the 20182019 Form 10-K. Due10-K, except for the item discussed here.
The impact of COVID-19 has adversely affected, and is expected to continue to adversely affect, our business, financial condition and results of operations.
The COVID-19 pandemic began to impact our operations late in the first quarter of 2020. Thus far, the impact of lost revenue has primarily affected our Promotional Solutions, Checks and Cloud Solutions segments. Our Payments segment could be impacted if new clients delay the implementation of our services because of the impacts of the pandemic. The sweeping nature of the pandemic makes it extremely difficult to predict how our business and operations will be affected in the longer term. Consistent with various state and federal orders, we were able to designate portions of our business as "essential." As such, many of our facilities remained open during government-mandated shut-downs. We successfully activated our business continuity plan to ensure uninterrupted operations and services, while keeping our facilities safe for our employees, customers and communities. Under this plan, employees who have the ability to work from home continue to do so, which poses additional cybersecurity and data security risk. Certain of our facilities remain closed and we may close additional facilities, as necessary, to protect the health of our employees, as a result of disruptions in the operation of our supply chain or in response to a prolonged decrease in demand for our products and services.
Because the current economic environment is significantly impacting small businesses, we are closely monitoring the breadth and depth of small business closures and bankruptcies, changes in the level of small business optimism, lending to small and mid-sized businesses and the general functioning of the credit markets, adoption of government stimulus and other economic programs, consumer unemployment levels and changes in consumer spending patterns. We cannot predict the pace
at which these factors will improve or the impact a prolonged downturn in the economy will have on our business, financial condition and/or results of operations.
We also incurred, and may continue to incur, additional costs as we respond to the announcementpandemic, including, but not limited to, costs incurred to implement operational changes allowing social distancing, costs related to employees who are not working during the pandemic, a Hero Pay premium provided to employees working on-site, overtime pay as required and costs associated with additional cleaning and disinfecting of our "New Deluxe" strategy, as discussedfacilities.
All of these circumstance negatively impact our liquidity. In response, in March 2020, we drew an additional $238.0 million on our $1.15 billion revolving credit facility. We repaid $100.0 million of the amount drawn in July 2020, and we repaid an additional $140.0 million in October 2020. The amounts repaid remain available to us for borrowing. In addition, we suspended our share repurchase program for the second and third quarters of 2020 and we took additional steps to reduce discretionary spending and other expenditures in line with revenue declines. These steps included temporary salary reductions for all salaried employees, including our leadership team and board of directors, project delays, furloughs and other actions. We also delayed U.S. federal income and payroll tax payments under the Coronavirus Aid, Relief and Economic Security (CARES) Act. We continue to monitor the situation closely, including impacts on our operations, suppliers, customers, industry and workforce. If conditions deteriorate, we may implement further measures to provide additional financial flexibility and to improve our cash position and liquidity, including additional borrowings under our revolving credit facility.
If demand for our products and services further deteriorates or does not return to normal levels in the Executive Overview sectionlonger term, we may be required to pursue additional sources of Management's Discussionfinancing to meet our financial obligations. Our credit facility includes an accordion feature allowing us, subject to lender consent, to expand the facility to $1.425 billion, and Analysis of Financial Conditionwe believe we could also currently access the capital markets. However, such financing is not guaranteed and Results of Operations appearing in Part I, Item 2 of this report, we have identified additional riskis largely dependent on market conditions and other factors that shouldexist at the time we seek to access such financing. Further actions may be considered when investing inrequired to improve our common stock.cash position, including but not limited to, implementing further employee furloughs and/or workforce reductions, or foregoing additional capital expenditures and other discretionary expenses. In addition, dividends are approved by our board of directors each quarter and thus, are subject to change.
Our recently announced strategic plan to implementThe situation surrounding COVID-19 remains fluid and the potential for a new go-to-market strategy and more integrated operations, transforming us into a Trusted, Tech-Enabled Solutions CompanyTM, is dependent upon our ability to successfully implement our strategic and tactical initiatives. If we are unsuccessful in achieving this transformation in a timely manner, our financial results could be adversely affected.
Our recently announced strategic plan contemplates that our strategic and tactical initiatives will result in, among other things, sustained organic revenue growth and strong adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins. We plan to achieve these results through a variety of initiatives, including greater integration of operations, a more streamlined sales process, more targeted cross-selling into our existing customer base, growing that customer base and reducing our cost structure. Our ability to achieve this strategic plan depends upon a variety of factors, including a number of factors that are beyond our control. If we are unable to successfully implement and execute the strategic and tactical initiatives underlying our strategic plan in a timely manner,material impact on our results of operations, financial condition cash flows and/orand liquidity could be adversely affected.
We plan to realign our existing businesses into four new primary focus areas: Payments, Cloud, Promotional Productsincreases the longer the virus impacts activity levels in the U.S. and Checks. Ifthe other countries in which we are unable to achieveoperate. For this realignment in a timely and cost-effective manner,reason, we cannot reasonably estimate with any degree of certainty the future impact the pandemic may have on our results of operations, could be adversely affected.
As wefinancial position and/or liquidity. The extent to which the COVID-19 pandemic impacts our business depends on future developments, many of which are beyond our control, such as: the severity and duration of the pandemic, business and workforce disruptions, and the effectiveness of actions taken to contain and treat the disease. We may not have previously announced, we believe that we can achieve greater operational synergiesyet experienced the full impact of the pandemic or its resulting impact on our customers. Our revenue may not immediately recover with an improvement in macro-economic conditions and reduce overall costs if we realignmay require new business formations and/or the expansion of sales to our existing operationscustomers.
In completing asset impairment analyses during the first quarter of 2020, we were required to focusmake assumptions using the best information available at the time, including the performance of our effortsreporting units subsequent to the declaration of a pandemic and available economic forecasts. These assumptions anticipated a sharp decline in four primary areasgross domestic product and a material decline in the number of small businesses. To the extent our assumptions differ materially and negatively from actual events, we may be required to record additional asset impairment charges.
Other cascading effects of the COVID-19 pandemic that we believe are critical to meeting our customers’ needs going forward: Payments, Cloud, Promotional Products and Checks. This realignment will take time, considerable senior management effort, material “buy-in” from our employees, and significant investment. If we are not able to achieve this realignment in a timelycurrently foreseeable could materially increase our costs, negatively impact our revenue and cost-effective manner,adversely impact our results of operations and liquidity, possibly to a significant degree. We cannot predict the severity or duration of any such impacts. The COVID-19 pandemic could be adversely affected.have the effect of heightening many of the other risks described in Item 1A of the 2019 10-K, including, without limitation, those related to the success of our strategy, our ability to attract and retain customers, competition, the rate of decline for checks and business forms, our ability to reduce costs, risks of cybersecurity breaches, interruptions to our website operations or information technology systems, the ability of third-party providers to perform and potential litigation. Risks related to the preparation of our consolidated financial statements are addressed under the caption: "Note 15: Risks and Uncertainties" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | | |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table shows purchases of our own common stock, based on trade date, that were completed during the third quarter of 2019:
|
| | | | | | | | | | | | | | |
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, 2019 – July 31, 2019 | | — |
| | $ | — |
| | — |
| | $ | 341,103,728 |
|
August 1, 2019 – August 31, 2019 | | 681,897 |
| | 44.67 |
| | 681,897 |
| | 310,642,888 |
|
September 1, 2019 – September 30, 2019 | | 193,790 |
| | 47.43 |
| | 193,790 |
| | 301,452,391 |
|
Total | | 875,687 |
| | 45.28 |
| | 875,687 |
| | 301,452,391 |
|
In October 2018, our board of directors authorized the repurchase of up to $500.0 million of our common stock. This authorization has no expiration date. No shares were repurchased during the third quarter of 2020 and $287.5 million remained available for repurchase as of September 30, 2020.
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 third quarter of 2019,2020, we withheld 4,6505,534 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.
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| | |
Exhibit NumberITEM 3. DEFAULTS UPON SENIOR SECURITIES |
None.
| | Description |
3.1ITEM 4. MINE SAFETY DISCLOSURES |
Not applicable.
| | |
10.1ITEM 5. OTHER INFORMATION |
None.
| | | | | | | | |
Exhibit Number | | Description |
31.1 | | |
31.2 | | |
32.1 | | |
101.INS | | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover page interactive data file (formatted as Inline XBRL and contained in Exhibit 101) |
* Denotes compensatory plan or management contract
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.
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| | | | |
| DELUXE CORPORATION (Registrant)
|
| |
Date: October 25, 2019November 6, 2020 | /s/ Barry C. McCarthy |
| Barry C. McCarthy President and Chief Executive Officer
(Principal Executive Officer)
|
| |
Date: October 25, 2019November 6, 2020 | /s/ Keith A. Bush |
| Keith A. Bush Senior Vice President, Chief Financial Officer
(Principal Financial Officer and Officer)
|
| |
Date: November 6, 2020 | /s/ Ronald Van Houwelingen |
| Ronald Van Houwelingen Vice President, Corporate Controller (Principal Accounting Officer) |