UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20202021
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ___________
Commission file number: 1-7945
DELUXE CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
MN | 41-0216800 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3680 Victoria St. N.801 S. Marquette Ave. | ShoreviewMinneapolis | MN | 55126-296655402-2807 |
(Address of principal executive offices) | (Zip Code) |
(651) 483-7111
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, par value $1.00 per share | DLX | NYSE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large Accelerated Filer | ☒ | Accelerated Filer | ☐ |
Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
| | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
The number of shares outstanding of registrant’s common stock as of October 28, 202027, 2021 was 41,893,988.42,605,822.
| | |
PART I – FINANCIAL INFORMATION |
| | |
Item 1. FINANCIAL STATEMENTS |
| | |
DELUXE CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited) |
| (in thousands, except share par value) | (in thousands, except share par value) | | September 30, 2020 | | December 31, 2019 | (in thousands, except share par value) | | September 30, 2021 | | December 31, 2020 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Current assets: | Current 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 | | |
Cash and cash equivalents | | Cash and cash equivalents | | $ | 121,064 | | | $ | 123,122 | |
Trade accounts receivable, net of allowances for uncollectible accounts | | Trade accounts receivable, net of allowances for uncollectible accounts | | 174,546 | | | 161,959 | |
Inventories and supplies | Inventories and supplies | | 50,512 | | | 39,921 | | Inventories and supplies | | 35,355 | | | 40,130 | |
Funds held for customers, including securities carried at fair value of $23,613 and $34,450, respectively | | 106,199 | | | 117,641 | | |
Funds held for customers, including securities carried at fair value of $13,302 and $28,462, respectively | | Funds held for customers, including securities carried at fair value of $13,302 and $28,462, respectively | | 142,482 | | | 119,749 | |
Revenue in excess of billings | Revenue in excess of billings | | 29,307 | | | 32,790 | | Revenue in excess of billings | | 41,189 | | | 17,617 | |
Other current assets | Other current assets | | 43,139 | | | 44,818 | | Other current assets | | 52,890 | | | 44,054 | |
Total current assets | Total current assets | | 677,936 | | | 472,211 | | Total current assets | | 567,526 | | | 506,631 | |
Deferred income taxes | Deferred income taxes | | 5,834 | | | 3,907 | | Deferred income taxes | | 2,290 | | | 6,642 | |
Long-term investments | Long-term investments | | 45,522 | | | 44,995 | | Long-term investments | | 46,832 | | | 45,919 | |
Property, plant and equipment, net of accumulated depreciation of $365,250 and $377,180, respectively | | 80,694 | | | 96,467 | | |
Property, plant and equipment, net of accumulated depreciation of $346,364 and $360,907, respectively | | Property, plant and equipment, net of accumulated depreciation of $346,364 and $360,907, respectively | | 129,712 | | | 88,680 | |
Operating lease assets | Operating lease assets | | 40,475 | | | 44,372 | | Operating lease assets | | 58,442 | | | 35,906 | |
Intangibles, net of accumulated amortization of $596,778 and $557,023, respectively | | 234,764 | | | 276,122 | | |
Intangibles, net of accumulated amortization of $675,417 and $587,273, respectively | | Intangibles, net of accumulated amortization of $675,417 and $587,273, respectively | | 515,936 | | | 246,760 | |
Goodwill | Goodwill | | 736,779 | | | 804,487 | | Goodwill | | 1,435,483 | | | 702,958 | |
Other non-current assets | Other non-current assets | | 185,175 | | | 200,750 | | Other non-current assets | | 249,972 | | | 208,679 | |
Total assets | Total assets | | $ | 2,007,179 | | | $ | 1,943,311 | | Total assets | | $ | 3,006,193 | | | $ | 1,842,175 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current liabilities: | Current liabilities: | | | | | Current liabilities: | | | | |
Accounts payable | Accounts payable | | $ | 113,120 | | | $ | 112,198 | | Accounts payable | | $ | 138,339 | | | $ | 116,990 | |
Funds held for customers | Funds held for customers | | 104,197 | | | 116,411 | | Funds held for customers | | 141,597 | | | 117,647 | |
Accrued liabilities | Accrued liabilities | | 161,542 | | | 179,338 | | Accrued liabilities | | 203,784 | | | 177,183 | |
Current portion of long-term debt | | Current portion of long-term debt | | 57,167 | | | — | |
Total current liabilities | Total current liabilities | | 378,859 | | | 407,947 | | Total current liabilities | | 540,887 | | | 411,820 | |
Long-term debt | Long-term debt | | 1,040,000 | | | 883,500 | | Long-term debt | | 1,719,000 | | | 840,000 | |
Operating lease liabilities | Operating lease liabilities | | 30,909 | | | 33,585 | | Operating lease liabilities | | 49,827 | | | 28,344 | |
Deferred income taxes | Deferred income taxes | | 4,794 | | | 14,898 | | Deferred income taxes | | 66,637 | | | 5,401 | |
Other non-current liabilities | Other non-current liabilities | | 41,173 | | | 32,520 | | Other non-current liabilities | | 71,976 | | | 43,218 | |
Commitments and contingencies (Notes 12 and 15) | | | | |
Commitments and contingencies (Notes 14 and 17) | | Commitments and contingencies (Notes 14 and 17) | | 0 | | 0 |
Shareholders' equity: | Shareholders' equity: | | | | | 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 | | |
Common shares $1 par value (authorized: 500,000 shares; outstanding: September 30, 2021 – 42,601; December 31, 2020 – 41,973) | | Common shares $1 par value (authorized: 500,000 shares; outstanding: September 30, 2021 – 42,601; December 31, 2020 – 41,973) | | 42,601 | | | 41,973 | |
Additional paid-in capital | Additional paid-in capital | | 11,554 | | | 4,086 | | Additional paid-in capital | | 50,156 | | | 17,558 | |
Retained earnings | Retained earnings | | 510,805 | | | 572,596 | | Retained earnings | | 505,100 | | | 495,153 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (52,904) | | | (47,947) | | Accumulated other comprehensive loss | | (40,231) | | | (41,433) | |
Non-controlling interest | Non-controlling interest | | 96 | | | 0 | | Non-controlling interest | | 240 | | | 141 | |
Total shareholders’ equity | Total shareholders’ equity | | 511,444 | | | 570,861 | | Total shareholders’ equity | | 557,866 | | | 513,392 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 2,007,179 | | | $ | 1,943,311 | | Total liabilities and shareholders’ equity | | $ | 3,006,193 | | | $ | 1,842,175 | |
See Condensed Notes to Unaudited Consolidated Financial Statements
| | |
DELUXE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) |
| | | Quarter Ended September 30, | | Nine Months Ended September 30, | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share amounts) | (in thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands, except per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 |
Product revenue | Product revenue | | $ | 298,751 | | | $ | 346,315 | | | $ | 908,146 | | | $ | 1,043,896 | | Product revenue | | $ | 302,369 | | | $ | 298,751 | | | $ | 907,646 | | | $ | 908,146 | |
Service revenue | Service revenue | | 140,710 | | | 147,278 | | | 428,142 | | | 442,749 | | Service revenue | | 229,772 | | | 140,710 | | | 543,976 | | | 428,142 | |
Total revenue | Total revenue | | 439,461 | | | 493,593 | | | 1,336,288 | | | 1,486,645 | | Total revenue | | 532,141 | | | 439,461 | | | 1,451,622 | | | 1,336,288 | |
Cost of products | Cost of products | | (108,369) | | | (133,807) | | | (332,818) | | | (398,869) | | Cost of products | | (111,008) | | | (108,369) | | | (330,896) | | | (332,818) | |
Cost of services | Cost of services | | (66,092) | | | (69,916) | | | (205,974) | | | (207,006) | | Cost of services | | (133,143) | | | (66,092) | | | (298,341) | | | (205,974) | |
Total cost of revenue | Total cost of revenue | | (174,461) | | | (203,723) | | | (538,792) | | | (605,875) | | Total cost of revenue | | (244,151) | | | (174,461) | | | (629,237) | | | (538,792) | |
Gross profit | Gross profit | | 265,000 | | | 289,870 | | | 797,496 | | | 880,770 | | Gross profit | | 287,990 | | | 265,000 | | | 822,385 | | | 797,496 | |
Selling, general and administrative expense | Selling, general and administrative expense | | (198,871) | | | (213,318) | | | (634,645) | | | (665,787) | | Selling, general and administrative expense | | (239,251) | | | (198,871) | | | (685,593) | | | (634,645) | |
Restructuring and integration expense | Restructuring and integration expense | | (18,949) | | | (26,255) | | | (56,957) | | | (49,089) | | Restructuring and integration expense | | (12,335) | | | (18,949) | | | (38,012) | | | (56,957) | |
Asset impairment charges | Asset impairment charges | | (2,760) | | | (390,980) | | | (97,973) | | | (390,980) | | Asset impairment charges | | — | | | (2,760) | | | — | | | (101,749) | |
Operating income (loss) | | 44,420 | | | (340,683) | | | 7,921 | | | (225,086) | | |
Operating income | | Operating income | | 36,404 | | | 44,420 | | | 98,780 | | | 4,145 | |
Interest expense | Interest expense | | (5,083) | | | (8,710) | | | (18,254) | | | (27,251) | | Interest expense | | (21,494) | | | (5,083) | | | (35,548) | | | (18,254) | |
Other income | Other income | | 2,201 | | | 2,183 | | | 8,482 | | | 6,118 | | Other income | | 2,282 | | | 2,201 | | | 6,443 | | | 8,482 | |
Income (loss) before income taxes | Income (loss) before income taxes | | 41,538 | | | (347,210) | | | (1,851) | | | (246,219) | | Income (loss) before income taxes | | 17,192 | | | 41,538 | | | 69,675 | | | (5,627) | |
Income tax (provision) benefit | | (12,094) | | | 28,717 | | | (13,958) | | | 1,498 | | |
Income tax provision | | Income tax provision | | (4,691) | | | (12,094) | | | (20,720) | | | (13,746) | |
Net income (loss) | Net income (loss) | | 29,444 | | | (318,493) | | | (15,809) | | | (244,721) | | Net income (loss) | | 12,501 | | | 29,444 | | | 48,955 | | | (19,373) | |
Net income attributable to non-controlling interest | Net income attributable to non-controlling interest | | (27) | | | 0 | | | (46) | | | 0 | | Net income attributable to non-controlling interest | | (37) | | | (27) | | | (99) | | | (46) | |
Net income (loss) attributable to Deluxe | Net income (loss) attributable to Deluxe | | $ | 29,417 | | | $ | (318,493) | | | $ | (15,855) | | | $ | (244,721) | | Net income (loss) attributable to Deluxe | | $ | 12,464 | | | $ | 29,417 | | | $ | 48,856 | | | $ | (19,419) | |
Total comprehensive income (loss) | Total comprehensive income (loss) | | $ | 32,319 | | | $ | (322,150) | | | $ | (20,766) | | | $ | (245,326) | | Total comprehensive income (loss) | | $ | 10,099 | | | $ | 32,319 | | | $ | 50,157 | | | $ | (24,330) | |
Comprehensive income (loss) attributable to Deluxe | Comprehensive income (loss) attributable to Deluxe | | 32,292 | | | (322,150) | | | (20,812) | | | (245,326) | | Comprehensive income (loss) attributable to Deluxe | | 10,062 | | | 32,292 | | | 50,058 | | | (24,376) | |
Basic earnings (loss) per share | Basic earnings (loss) per share | | 0.70 | | | (7.49) | | | (0.38) | | | (5.65) | | Basic earnings (loss) per share | | 0.29 | | | 0.70 | | | 1.15 | | | (0.46) | |
Diluted earnings (loss) per share | Diluted earnings (loss) per share | | 0.70 | | | (7.49) | | | (0.40) | | | (5.65) | | Diluted earnings (loss) per share | | 0.28 | | | 0.70 | | | 1.13 | | | (0.48) | |
See Condensed Notes to Unaudited Consolidated Financial Statements
| | |
DELUXE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Common shares | | Common shares par value | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Non-controlling interest | | Total |
Balance, June 30, 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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, 2021 | | 42,537 | | | $ | 42,537 | | | $ | 41,607 | | | $ | 505,753 | | | $ | (37,829) | | | $ | 203 | | | $ | 552,271 | |
Net income | | — | | | — | | | — | | | 12,464 | | | — | | | 37 | | | 12,501 | |
Cash dividends ($0.30 per share) | | — | | | — | | | — | | | (13,117) | | | — | | | — | | | (13,117) | |
Common shares issued | | 75 | | | 75 | | | 1,104 | | | — | | | — | | | — | | | 1,179 | |
Common shares retired | | (11) | | | (11) | | | (452) | | | — | | | — | | | — | | | (463) | |
Employee share-based compensation | | — | | | — | | | 7,897 | | | — | | | — | | | — | | | 7,897 | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (2,402) | | | — | | | (2,402) | |
Balance, September 30, 2021 | | 42,601 | | | $ | 42,601 | | | $ | 50,156 | | | $ | 505,100 | | | $ | (40,231) | | | $ | 240 | | | $ | 557,866 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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, 2020 | | 41,973 | | | $ | 41,973 | | | $ | 17,558 | | | $ | 495,153 | | | $ | (41,433) | | | $ | 141 | | | $ | 513,392 | |
Net income | | — | | | — | | | — | | | 48,856 | | | — | | | 99 | | | 48,955 | |
Cash dividends ($0.90 per share) | | — | | | — | | | — | | | (38,909) | | | — | | | — | | | (38,909) | |
Common shares issued | | 744 | | | 744 | | | 15,655 | | | — | | | — | | | — | | | 16,399 | |
Common shares retired | | (116) | | | (116) | | | (4,518) | | | — | | | — | | | — | | | (4,634) | |
Employee share-based compensation | | — | | | — | | | 21,461 | | | — | | | — | | | — | | | 21,461 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | 1,202 | | | — | | | 1,202 | |
Balance, September 30, 2021 | | 42,601 | | | $ | 42,601 | | | $ | 50,156 | | | $ | 505,100 | | | $ | (40,231) | | | $ | 240 | | | $ | 557,866 | |
See Condensed Notes to Unaudited Consolidated Financial Statements
| | |
DELUXE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued) (unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Common shares | | Common shares par value | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | 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 | | Non-controlling interest | | Total |
Balance, June 30, 2020 | | 41,855 | | | $ | 41,855 | | | $ | 4,950 | | | $ | 466,797 | | | $ | (55,779) | | | $ | 69 | | | $ | 457,892 | |
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 | | | $ | 483,359 | | | $ | (52,904) | | | $ | 96 | | | $ | 483,998 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 | | | $ | 548,714 | | | $ | (47,947) | | | $ | — | | | $ | 546,979 | |
Net loss | | — | | | — | | | — | | | (19,419) | | | — | | | 46 | | | (19,373) | |
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 | | — | | — | | — | | (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 | | | $ | 483,359 | | | $ | (52,904) | | | $ | 96 | | | $ | 483,998 | |
See Condensed Notes to Unaudited Consolidated Financial Statements
| | |
DELUXE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) |
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | |
Net loss | | $ | (15,809) | | | $ | (244,721) | | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
Net income (loss) | | Net income (loss) | | $ | 48,955 | | | $ | (19,373) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Depreciation | Depreciation | | 15,510 | | | 12,206 | | Depreciation | | 14,536 | | | 15,510 | |
Amortization of intangibles | Amortization of intangibles | | 67,555 | | | 83,224 | | Amortization of intangibles | | 88,393 | | | 67,555 | |
Operating lease expense | Operating lease expense | | 15,044 | | | 15,145 | | Operating lease expense | | 12,897 | | | 15,044 | |
Asset impairment charges | Asset impairment charges | | 97,973 | | | 390,980 | | Asset impairment charges | | — | | | 101,749 | |
Amortization of prepaid product discounts | Amortization of prepaid product discounts | | 21,725 | | | 17,861 | | Amortization of prepaid product discounts | | 23,425 | | | 21,725 | |
Deferred income taxes | Deferred income taxes | | (9,395) | | | (38,549) | | Deferred income taxes | | 13,733 | | | (9,607) | |
Employee share-based compensation expense | Employee share-based compensation expense | | 15,335 | | | 14,580 | | Employee share-based compensation expense | | 21,801 | | | 15,335 | |
Other non-cash items, net | Other non-cash items, net | | 15,231 | | | 10,082 | | Other non-cash items, net | | 10,459 | | | 15,231 | |
Changes in assets and liabilities: | | | | | |
Changes in assets and liabilities, net of effect of acquisition: | | Changes in assets and liabilities, net of effect of acquisition: | | | | |
Trade accounts receivable | Trade accounts receivable | | 21,376 | | | 27,505 | | Trade accounts receivable | | 15,164 | | | 21,376 | |
Inventories and supplies | Inventories and supplies | | (11,938) | | | 2,728 | | Inventories and supplies | | 3,787 | | | (11,938) | |
Other current assets | Other current assets | | 2,158 | | | (3,213) | | Other current assets | | (27,495) | | | 2,158 | |
Non-current assets | Non-current assets | | (13,335) | | | (3,346) | | Non-current assets | | (35,821) | | | (13,335) | |
Accounts payable | Accounts payable | | (9,830) | | | (10,779) | | Accounts payable | | 8,538 | | | (9,830) | |
Prepaid product discount payments | Prepaid product discount payments | | (24,947) | | | (20,370) | | Prepaid product discount payments | | (27,049) | | | (24,947) | |
Other accrued and non-current liabilities | Other accrued and non-current liabilities | | (19,842) | | | (45,309) | | Other accrued and non-current liabilities | | (22,094) | | | (19,842) | |
Net cash provided by operating activities | Net cash provided by operating activities | | 166,811 | | | 208,024 | | Net cash provided by operating activities | | 149,229 | | | 166,811 | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | | |
Payment for acquisition, net of cash, cash equivalents,restricted cash and restricted cash equivalents acquired | | Payment for acquisition, net of cash, cash equivalents,restricted cash and restricted cash equivalents acquired | | (956,717) | | | — | |
Purchases of capital assets | Purchases of capital assets | | (42,707) | | | (49,679) | | Purchases of capital assets | | (81,081) | | | (42,707) | |
Proceeds from sale of facilities | | 9,713 | | | 0 | | |
Proceeds from sales of facilities | | Proceeds from sales of facilities | | 2,648 | | | 9,713 | |
Purchases of customer funds marketable securities | Purchases of customer funds marketable securities | | (3,742) | | | (3,817) | | Purchases of customer funds marketable securities | | (73) | | | (3,742) | |
Proceeds from customer funds marketable securities | Proceeds from customer funds marketable securities | | 3,742 | | | 3,817 | | Proceeds from customer funds marketable securities | | 73 | | | 3,742 | |
Other | Other | | 1,326 | | | 3,147 | | Other | | (1,211) | | | 1,326 | |
Net cash used by investing activities | Net cash used by investing activities | | (31,668) | | | (46,532) | | Net cash used by investing activities | | (1,036,361) | | | (31,668) | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | | Cash flows from financing activities: | | | | |
Proceeds from issuing long-term debt | | 309,000 | | | 203,500 | | |
Proceeds from issuing long-term debt, net of discount | | Proceeds from issuing long-term debt, net of discount | | 1,852,850 | | | 309,000 | |
Payments on long-term debt | Payments on long-term debt | | (152,500) | | | (189,500) | | Payments on long-term debt | | (903,438) | | | (152,500) | |
Payments for debt issuance costs | | Payments for debt issuance costs | | (18,153) | | | — | |
Net change in customer funds obligations | Net change in customer funds obligations | | (9,375) | | | (8,711) | | Net change in customer funds obligations | | 14,913 | | | (9,375) | |
Proceeds from issuing shares under employee plans | | 3,048 | | | 3,159 | | |
Proceeds from issuing shares | | Proceeds from issuing shares | | 16,031 | | | 3,048 | |
Employee taxes paid for shares withheld | Employee taxes paid for shares withheld | | (2,023) | | | (3,076) | | Employee taxes paid for shares withheld | | (4,634) | | | (2,023) | |
Payments for common shares repurchased | Payments for common shares repurchased | | (14,000) | | | (118,547) | | Payments for common shares repurchased | | — | | | (14,000) | |
Cash dividends paid to shareholders | Cash dividends paid to shareholders | | (38,057) | | | (39,068) | | Cash dividends paid to shareholders | | (38,695) | | | (38,057) | |
Other | Other | | (2,734) | | | (5,001) | | Other | | (7,254) | | | (2,734) | |
Net cash provided (used) by financing activities | | 93,359 | | | (157,244) | | |
Net cash provided by financing activities | | Net cash provided by financing activities | | 911,620 | | | 93,359 | |
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | | (3,297) | | | 2,604 | | Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | | (793) | | | (3,297) | |
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | 225,205 | | | 6,852 | | Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | 23,695 | | | 225,205 | |
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year | 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, beginning of year | | 229,409 | | | 174,811 | |
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3) | Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3) | | $ | 400,016 | | | $ | 152,111 | | Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3) | | $ | 253,104 | | | $ | 400,016 | |
See Condensed Notes to Unaudited Consolidated Financial Statements
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
| | |
NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS |
The consolidated balance sheet as of September 30, 2020,2021, the consolidated statements of comprehensive income (loss) for the quarters and nine months ended September 30, 20202021 and 2019,2020, the consolidated statements of shareholders’ equity for the quarters and nine monthsended September 30, 20202021 and 20192020 and the consolidated statements of cash flows for the nine months ended September 30, 20202021 and 20192020 are unaudited. The consolidated balance sheet as of December 31, 20192020 was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (GAAP). In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial statements are included. Adjustments consist only of normal recurring items, except for any items discussed in the notes below. Interim results are not necessarily indicative of results for a full year. 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, 20192020 (the 20192020 Form 10-K).
The preparation of our consolidated financial statements requires us to make certain estimates judgments and assumptions that affectaffecting the amounts reported amounts of assets, liabilities, revenuesin the consolidated financial statements and expenses and the related disclosure of contingent assets and liabilities.notes. 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, liabilities, revenues and expenses and the related disclosure of contingent 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 15.17.
Non-controlling interestRevision – Effective April 1,During the second quarter of 2021, we identified errors in the calculations of the goodwill impairment charges recorded during the third quarter of 2019 and the first quarter of 2020, we executedresulting in an agreementunderstatement of the goodwill impairment charges and net losses and an overstatement of goodwill. The errors in our calculations resulted from the erroneous application of the simultaneous equation method, which effectively grosses up the goodwill impairment charge to form MedPayaccount for the related income tax benefit, so that the resulting carrying value does not exceed the calculated fair value.
We assessed the materiality of the errors on prior period financial statements in accordance with Securities and Exchange LLC (MPX)Commission Staff Accounting Bulletin No. 99, Materiality, which delivers payments to healthcare providers from insurance companies and other payers. This entity is a variable interest entity (VIE), as definedcodified in Accounting Standards Codification Topic 810,(ASC) 250, ConsolidationPresentation of Financial Statements. As we areWe concluded that the primary beneficiary of the VIE, we are requirederrors were not material to consolidate MPX in our prior period consolidated financial statements. Our partner’s interest in MPX is reported as non-controlling interest instatements and therefore, amendments of previously filed consolidated financial statements are not required. In accordance with ASC 250, we have corrected the errors by revising 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 consolidatedfinancial statements of comprehensive income (loss). The amounts attributable to the non-controlling interest werepresented herein. Prior periods not significant for the quarter or nine months ended September 30, 2020.
Comparability– Amounts on the consolidated balance sheetpresented herein will be revised, as of December 31, 2019 and amounts within cash flows from operating activities and cash flows from investing activities on the consolidated statement of cash flows for the nine months ended September 30, 2019 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.applicable, in future filings.
DuringThe adjustments for the third quarter ended September 30, 2020, we identified the incorrect presentation of certain amounts reported2019 resulted in an increase of $30,110 in the 2019 consolidated statementspretax asset impairment charges. Net of cash flows. We determined that holdback payments for acquisitions and asset purchases were incorrectly includedthe related tax benefit of $6,228, this resulted in an increase 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 statementsloss of $23,882 for the nine months ended September 30,third quarter of 2019 and the presentationyear ended December 31, 2019. Revised basic and diluted loss per share for the year ended December 31, 2019 increased from $4.65, as previously reported, to $5.20. The adjustments for the first quarter of these amounts has been corrected2020 resulted in an increase of $3,776 in the consolidated statementpretax asset impairment charges. Net of cash flowsthe related tax benefit of $212, this resulted in an increase in net loss of $3,564 for the nine monthsfirst quarter of 2020 and a decrease in net income of $3,564 for the year ended September 30, 2019 appearing herein. This revision had no impactDecember 31, 2020. Revised basic earnings per share for the year ended December 31, 2020 decreased from $0.21, as previously reported, to $0.12. Revised diluted earnings per share for the year ended December 31, 2020 decreased from $0.19, as previously reported, to $0.11. The impacts of the revisions on the amount reported for cash, cash equivalents, restricted cash and restricted cash equivalents as of September 30, 2019.periods presented herein are provided in the following tables.
| | |
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 comprehensive loss for the nine months ended September 30, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
(in thousands, except per share amounts) | | As previously reported | | Adjustments | | As revised |
Asset impairment charges | | $ | (97,973) | | | $ | (3,776) | | | $ | (101,749) | |
Operating income | | 7,921 | | | (3,776) | | | 4,145 | |
Loss before income taxes | | (1,851) | | | (3,776) | | | (5,627) | |
Income tax provision | | (13,958) | | | 212 | | | (13,746) | |
Net loss | | (15,809) | | | (3,564) | | | (19,373) | |
Net loss attributable to Deluxe | | (15,855) | | | (3,564) | | | (19,419) | |
Total comprehensive loss | | (20,766) | | | (3,564) | | | (24,330) | |
Comprehensive loss attributable to Deluxe | | (20,812) | | | (3,564) | | | (24,376) | |
Basic loss per share | | (0.38) | | | (0.08) | | | (0.46) | |
Diluted loss per share | | (0.40) | | | (0.08) | | | (0.48) | |
The impact of the revision on the consolidated balance sheet as of December 31, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | As previously reported | | Adjustments | | As revised |
ASSETS | | | | | | |
Deferred income taxes | | $ | 5,444 | | | $ | 1,198 | | | $ | 6,642 | |
Goodwill | | 736,844 | | | (33,886) | | | 702,958 | |
Total assets | | 1,874,863 | | | (32,688) | | | 1,842,175 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | |
Deferred income taxes | | $ | 10,643 | | | $ | (5,242) | | | $ | 5,401 | |
Retained earnings | | 522,599 | | | (27,446) | | | 495,153 | |
Total shareholders' equity | | 540,838 | | | (27,446) | | | 513,392 | |
Total liabilities and shareholders' equity | | 1,874,863 | | | (32,688) | | | 1,842,175 | |
The impact of the revision on the consolidated statement of cash flows for the nine months ended September 30, 20192020 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) | | As previously reported | | Adjustments | | As revised |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (15,809) | | | $ | (3,564) | | | $ | (19,373) | |
Asset impairment charges | | 97,973 | | | 3,776 | | | 101,749 | |
Deferred income taxes | | (9,395) | | | (212) | | | (9,607) | |
| | |
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS |
Recently Adopted Accounting Standards
ASU No. 2016-13 – In June 2016,December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13,2019-12, Measurement of Credit Losses on Financial InstrumentsSimplifying the Accounting for Income Taxes. Subsequently, the FASB issuedThis standard addressed several amendments to this standard. These standards replace the incurred loss methodology previously utilized for valuing financial instruments with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurementspecific areas of expected losses under the CECL methodology is applicable to financial instruments measured at amortized cost, including accounts and notes receivable. The standards also made targeted changes to the accounting for available-for-sale debt securities.income taxes. We adopted the standardsthis standard on January 1, 20202021. Portions of the standard were adopted prospectively and certain aspects were required to be adopted using the modified retrospective method for financial instruments measured at amortized cost. Underapproach. Adoption of this method, prior period amounts continuestandard did not require an adjustment to be reported in accordance with previously applicable GAAP. We recorded a net decrease in retained earnings and did not have a significant impact on our results 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.operations or financial position.
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 limited to, general economic conditions, changes in the markets 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 our loans and notes receivable have longer 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 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,October 2021, the FASB issued ASU No. 2018-13,2021-08, Disclosure Framework – Changes to the Disclosure RequirementsAccounting for Fair Value MeasurementsContract Assets and Contract Liabilities from Contracts with Customers. This standard removes, modifiesrequires an acquirer to recognize and adds certain disclosures related to recurringmeasure contract assets and nonrecurring fair value measurements. During 2018, we adopted the provisions of the standard that remove and modify disclosure requirements. The additional disclosures were effective for us on January 1, 2020 and are required to be applied prospectively to fair value measurements completed on or after that 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 Incurredcontract liabilities acquired in a Cloud Computing Arrangement That Is a Service Contractbusiness combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. This standard aligns the requirements for capitalizingPreviously,
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
implementation costs incurred
contract assets and contract liabilities were recognized at fair value in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.business combination. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the new standard. We adopted this standard on January 1, 2020, applying it prospectively to eligible costs incurred on or after this date. Adoption of this standard did impact our results of operations and financial position, as we previously expensed these implementation costs as incurred. As 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 our 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 addresses several specific areas of accounting for income taxes. The guidance is effective for us on January 1, 2021. Portions of2023 and must be applied prospectively to business combinations with an acquisition date on or after the standardeffective date. We are required to be adopted prospectively and certain aspects will be adopted usingcurrently evaluating the modified retrospective approach. We do not expect the applicationimpact of this standard to have a significant impact on our results of operations orconsolidated financial position.statements and whether we will early adopt this standard.
| | |
NOTE 3: SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION |
Trade accounts receivable – Changes in the allowanceallowances for uncollectible accounts included within trade accounts receivable were as follows for the nine months ended September 30, 20202021 and 2019 were as follows:2020:
| | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
Balance, beginning of year | Balance, beginning of year | | $ | 4,985 | | | $ | 3,639 | | Balance, beginning of year | | $ | 6,428 | | | $ | 4,985 | |
Bad debt expense | | 4,174 | | | 3,718 | | |
Bad debt (benefit) expense | | Bad debt (benefit) expense | | (412) | | | 4,174 | |
Write-offs and other | Write-offs and other | | (2,671) | | | (2,537) | | Write-offs and other | | (2,555) | | | (2,671) | |
Balance, end of period | Balance, end of period | | $ | 6,488 | | | $ | 4,820 | | Balance, end of period | | $ | 3,461 | | | $ | 6,488 | |
Inventories and supplies – Inventories and supplies were comprised of the following:
| (in thousands) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | September 30, 2021 | | December 31, 2020 |
Raw materials | Raw materials | | $ | 7,025 | | | $ | 6,977 | | Raw materials | | $ | 5,327 | | | $ | 5,412 | |
Semi-finished goods | Semi-finished goods | | 7,151 | | | 7,368 | | Semi-finished goods | | 7,156 | | | 7,943 | |
Finished goods | Finished goods | | 33,144 | | | 21,982 | | Finished goods | | 22,788 | | | 33,513 | |
Supplies | Supplies | | 3,192 | | | 3,594 | | Supplies | | 5,580 | | | 5,010 | |
Reserve for excess and obsolete items | | Reserve for excess and obsolete items | | (5,496) | | | (11,748) | |
Inventories and supplies | Inventories and supplies | | $ | 50,512 | | | $ | 39,921 | | Inventories and supplies | | $ | 35,355 | | | $ | 40,130 | |
Changes in the reserve for excess and obsolete items were as follows for the nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2021 | | 2020 |
Balance, beginning of year | | $ | 11,748 | | | $ | 6,600 | |
Amounts charged to expense | | 2,884 | | | 1,270 | |
Write-offs and sales | | (9,136) | | | (1,188) | |
Balance, end of period | | $ | 5,496 | | | $ | 6,682 | |
Available-for-sale debt securities – Available-for-sale debt securities included within funds held for customers were comprised of the following:
| | | | September 30, 2020 | | | September 30, 2021 |
(in thousands) | (in thousands) | | Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value | (in thousands) | | Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Funds held for customers:(1) | Funds held for customers:(1) | | | Funds held for customers:(1) | | |
Domestic money market fund | | $ | 7,000 | | | $ | 0 | | | $ | 0 | | | $ | 7,000 | | |
Canadian and provincial government securities | Canadian and provincial government securities | | 8,968 | | | 137 | | | 0 | | | 9,105 | | Canadian and provincial government securities | | $ | 9,674 | | | $ | — | | | $ | (315) | | | $ | 9,359 | |
Canadian guaranteed investment certificates | | 7,508 | | | 0 | | | 0 | | | 7,508 | | |
Canadian guaranteed investment certificate | | Canadian guaranteed investment certificate | | 3,943 | | | — | | | — | | | 3,943 | |
Available-for-sale debt securities | Available-for-sale debt securities | | $ | 23,476 | | | $ | 137 | | | $ | 0 | | | $ | 23,613 | | Available-for-sale debt securities | | $ | 13,617 | | | $ | — | | | $ | (315) | | | $ | 13,302 | |
(1) Funds held for customers, as reported on the consolidated balance sheet as of September 30, 2020,2021, also included cash of $82,586.$129,180.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
(in thousands) | | Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Funds held for customers:(1) | | | | | | | | |
Domestic money market fund | | $ | 15,000 | | | $ | — | | | $ | — | | | $ | 15,000 | |
Canadian and provincial government securities | | 9,566 | | | — | | | (33) | | | 9,533 | |
Canadian guaranteed investment certificate | | 3,929 | | | — | | | — | | | 3,929 | |
Available-for-sale debt securities | | $ | 28,495 | | | $ | — | | | $ | (33) | | | $ | 28,462 | |
(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2019,2020, also included cash of $83,191.$91,287.
Expected maturities of available-for-sale debt securities as of September 30, 20202021 were as follows:
| | | | | | | | |
(in thousands) | | Fair value |
Due in one year or less | | $ | 13,0577,041 | |
Due in two to five years | | 6,5953,453 | |
Due in six to ten years | | 3,9612,808 | |
Available-for-sale debt securities | | $ | 23,61313,302 | |
Further information regarding the fair value of available-for-sale debt securities can be found in Note 7.8.
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) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | September 30, 2021 | | December 31, 2020 |
Conditional right to receive consideration | Conditional right to receive consideration | | $ | 19,611 | | | $ | 24,499 | | Conditional right to receive consideration | | $ | 28,157 | | | $ | 13,950 | |
Unconditional right to receive consideration(1) | Unconditional right to receive consideration(1) | | 9,696 | | | 8,291 | | Unconditional right to receive consideration(1) | | 13,032 | | | 3,667 | |
Revenue in excess of billings | Revenue in excess of billings | | $ | 29,307 | | | $ | 32,790 | | Revenue in excess of billings | | $ | 41,189 | | | $ | 17,617 | |
(1) Represents revenues that are earned but not currently billable under the related contract terms. Trade accounts receivable on the consolidated balance sheets included unbilled receivables of $29,993 as of September 30, 2021 and $21,319 as of December 31, 2020.
Intangibles – Intangibles were comprised of the following:
| | | | September 30, 2020 | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 |
(in thousands) | (in thousands) | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | (in thousands) | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Amortizable intangibles: | Amortizable intangibles: | | | | | | | | | | | | | Amortizable intangibles: | | | | | | | | | | | | |
Customer lists/relationships | | Customer lists/relationships | | $ | 495,416 | | | $ | (243,817) | | | $ | 251,599 | | | $ | 352,895 | | | $ | (202,428) | | | $ | 150,467 | |
Internal-use software | Internal-use software | | $ | 400,964 | | | $ | (325,746) | | | $ | 75,218 | | | $ | 380,905 | | | $ | (299,698) | | | $ | 81,207 | | Internal-use software | | 439,785 | | | (337,242) | | | 102,543 | | | 380,144 | | | (303,422) | | | 76,722 | |
Customer lists/relationships | | 328,967 | | | (191,964) | | | 137,003 | | | 348,055 | | | (187,462) | | | 160,593 | | |
Technology-based intangibles | | Technology-based intangibles | | 99,813 | | | (35,013) | | | 64,800 | | | 33,813 | | | (27,613) | | | 6,200 | |
Partner relationships | | Partner relationships | | 67,406 | | | (1,525) | | | 65,881 | | | — | | | — | | | — | |
Trade names | | Trade names | | 52,033 | | | (30,766) | | | 21,267 | | | 30,281 | | | (29,926) | | | 355 | |
Software to be sold | Software to be sold | | 36,900 | | | (22,827) | | | 14,073 | | | 36,900 | | | (19,657) | | | 17,243 | | Software to be sold | | 36,900 | | | (27,054) | | | 9,846 | | | 36,900 | | | (23,884) | | | 13,016 | |
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 | Intangibles | | $ | 831,542 | | | $ | (596,778) | | | $ | 234,764 | | | $ | 833,145 | | | $ | (557,023) | | | $ | 276,122 | | Intangibles | | $ | 1,191,353 | | | $ | (675,417) | | | $ | 515,936 | | | $ | 834,033 | | | $ | (587,273) | | | $ | 246,760 | |
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
During the nine months ended September 30, 2020,second quarter of 2021, we recorded asset impairment charges related to certainacquired amortizable intangible assets.assets in conjunction with the acquisition of First American Payment Systems, L.P. (First American). Further information can be found in Note 7.6.
Amortization of intangibles was $36,570 for the quarter ended September 30, 2021, $22,515 for the quarter ended September 30, 2020, $26,736$88,393 for the quarternine months ended September 30, 2019,2021 and $67,555 for the nine months ended September 30, 2020 and $83,224 for the nine months ended September 30, 2019.2020. Based on the intangibles in service as of September 30, 2020,2021, estimated future amortization expense is as follows:
| (in thousands) | (in thousands) | | Estimated amortization expense | (in thousands) | | Estimated amortization expense |
Remainder of 2020 | | $ | 23,996 | | |
2021 | | 75,519 | | |
Remainder of 2021 | | Remainder of 2021 | | $ | 41,235 | |
2022 | 2022 | | 51,087 | | 2022 | | 130,462 | |
2023 | 2023 | | 33,349 | | 2023 | | 101,863 | |
2024 | 2024 | | 18,185 | | 2024 | | 62,576 | |
2025 | | 2025 | | 46,791 | |
The following intangibles were acquired during the nine months ended September 30, 2020:2021, including assets acquired in conjunction with the acquisition of First American (Note 6): | | | | | | | | | | | | | | |
(in thousands) | | Amount | | Weighted-average amortization period (in years) |
Customer lists/relationships(1) | | $ | 142,514 | | | 8 |
Partner relationships | | 67,406 | | | 15 |
Technology-based intangibles | | 66,000 | | | 8 |
Internal-use software | | 59,429 | | | 3 |
Trade names | | 22,000 | | | 10 |
Acquired intangibles | | $ | 357,349 | | | 9 |
| | | | | | | | | | | | | | |
(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) Included $118,000 acquired via the First American acquisition (Note 6) with a weighted-average useful life of 8 years.
Goodwill – Changes in goodwill by reportable segment and in total for the nine months ended September 30, 20202021 were as follows :follows:
| (in thousands) | (in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Total | (in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Total |
Balance, December 31, 2019: | | | | | | | | | |
Balance, December 31, 2020: | | Balance, December 31, 2020: | | | | | | | | |
Goodwill, gross | Goodwill, gross | | $ | 168,165 | | | $ | 432,984 | | | $ | 252,834 | | | $ | 434,812 | | | $ | 1,288,795 | | Goodwill, gross | | $ | 168,165 | | | $ | 432,984 | | | $ | 252,864 | | | $ | 434,812 | | | $ | 1,288,825 | |
Accumulated impairment charges | Accumulated impairment charges | | 0 | | | (357,741) | | | (126,567) | | | 0 | | | (484,308) | | Accumulated impairment charges | | — | | | (392,168) | | | (193,699) | | | — | | | (585,867) | |
Goodwill, net of accumulated impairment charges | Goodwill, net of accumulated impairment charges | | 168,165 | | | 75,243 | | | 126,267 | | | 434,812 | | | 804,487 | | Goodwill, net of accumulated impairment charges | | 168,165 | | | 40,816 | | | 59,165 | | | 434,812 | | | 702,958 | |
Impairment charges (Note 7) | | — | | | (4,317) | | | (63,356) | | | — | | | (67,673) | | |
Goodwill resulting from acquisition (Note 6) | | Goodwill resulting from acquisition (Note 6) | | 732,520 | | | — | | | — | | | — | | | 732,520 | |
Currency translation adjustment | Currency translation adjustment | | — | | | — | | | (35) | | | — | | | (35) | | Currency translation adjustment | | — | | | — | | | 5 | | | — | | | 5 | |
Balance, September 30, 2020 | | $ | 168,165 | | | $ | 70,926 | | | $ | 62,876 | | | $ | 434,812 | | | $ | 736,779 | | |
Balance, September 30, 2021 | | Balance, September 30, 2021 | | $ | 900,685 | | | $ | 40,816 | | | $ | 59,170 | | | $ | 434,812 | | | $ | 1,435,483 | |
| Balance, September 30, 2020: | | | | | | | | | |
Balance, September 30, 2021: | | Balance, September 30, 2021: | | | | | | | | |
Goodwill, gross | Goodwill, gross | | $ | 168,165 | | | $ | 432,984 | | | $ | 252,799 | | | $ | 434,812 | | | $ | 1,288,760 | | Goodwill, gross | | $ | 900,685 | | | $ | 432,984 | | | $ | 252,869 | | | $ | 434,812 | | | $ | 2,021,350 | |
Accumulated impairment charges | Accumulated impairment charges | | 0 | | | (362,058) | | | (189,923) | | | 0 | | | (551,981) | | Accumulated impairment charges | | — | | | (392,168) | | | (193,699) | | | — | | | (585,867) | |
Goodwill, net of accumulated impairment charges | Goodwill, net of accumulated impairment charges | | $ | 168,165 | | | $ | 70,926 | | | $ | 62,876 | | | $ | 434,812 | | | $ | 736,779 | | Goodwill, net of accumulated impairment charges | | $ | 900,685 | | | $ | 40,816 | | | $ | 59,170 | | | $ | 434,812 | | | $ | 1,435,483 | |
| | |
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) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | September 30, 2021 | | December 31, 2020 |
Postretirement benefit plan asset | Postretirement benefit plan asset | | $ | 61,366 | | | $ | 56,743 | | Postretirement benefit plan asset | | $ | 76,435 | | | $ | 71,208 | |
Cloud computing arrangements | | Cloud computing arrangements | | 52,900 | | | 29,242 | |
Prepaid product discounts | Prepaid product discounts | | 41,249 | | | 51,145 | | Prepaid product discounts | | 51,270 | | | 50,602 | |
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 | | |
Loans and notes receivable from distributors, net of allowances for uncollectible accounts(1) | | Loans and notes receivable from distributors, net of allowances for uncollectible accounts(1) | | 20,424 | | | 35,068 | |
Deferred contract acquisition costs(2) | | Deferred contract acquisition costs(2) | | 17,480 | | | 9,199 | |
Other | Other | | 14,189 | | | 16,308 | | Other | | 31,463 | | | 13,360 | |
Other non-current assets | Other non-current assets | | $ | 185,175 | | | $ | 200,750 | | Other non-current assets | | $ | 249,972 | | | $ | 208,679 | |
(1) Amount Includes the non-current portion of loans and note receivables.notes receivable. The current portion of these receivables is included in other current assets on the consolidated balance sheets and was $2,935$1,305 as of September 30, 20202021 and $3,511$2,008 as of December 31, 2019.2020.
(2) Amortization of deferred sales commissionscontract acquisition costs was $3,366 for the nine months ended September 30, 2021 and $2,756 for the nine months ended September 30, 2020 and $2,246 for the nine months ended September 30, 2019.2020.
Upon adoption of ASU No. 2016-13 and related amendments on January 1, 2020 (Note 2), we recorded an additional allowanceChanges in the allowances for uncollectible accounts related to loans and notes receivable from Safeguard distributors. Changes in this allowancedistributors were as follows for the nine months ended September 30, 20202021 and 2019 were as follows:2020:
| | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
Balance, beginning of year | Balance, beginning of year | | $ | 284 | | | $ | 284 | | Balance, beginning of year | | $ | 3,995 | | | $ | 284 | |
Adoption of ASU No. 2016-13 (Note 2) | | 4,749 | | | — | | |
Bad debt expense | | 5,647 | | | 0 | | |
Adoption of ASU No. 2016-13 | | Adoption of ASU No. 2016-13 | | — | | | 4,749 | |
Bad debt (benefit) expense | | Bad debt (benefit) expense | | (1,158) | | | 5,647 | |
Exchange for customer lists | Exchange for customer lists | | (6,402) | | | 0 | | Exchange for customer lists | | — | | | (6,402) | |
Balance, end of period | Balance, end of period | | $ | 4,278 | | | $ | 284 | | Balance, end of period | | $ | 2,837 | | | $ | 4,278 | |
Bad debt expense for the nine months ended September 30, 2020 included loan-specific allowances primarily related to a distributorPromotional Solutions distributors that waswere underperforming. In calculating this reserve,these reserves, 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, 2021 or December 31, 2020.
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, 2020.2021. There were 0no write-offs and 0or recoveries recorded during the nine months ended September 30, 2020.2021.
| | | Loans and notes receivable from distributors amortized cost basis by origination year | | | Loans and notes receivable from distributors amortized cost basis by origination year | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total | (in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
Risk rating: | Risk rating: | | | Risk rating: | | |
1-2 internal grade | 1-2 internal grade | | $ | 1,361 | | | $ | 2,003 | | | $ | 23,843 | | | $ | 11,731 | | | $ | 216 | | | $ | 4,135 | | | $ | 43,289 | | 1-2 internal grade | | $ | 1,256 | | | $ | 497 | | | $ | 7,187 | | | $ | 11,705 | | | $ | 1,322 | | | $ | 21,967 | |
3-4 internal grade | 3-4 internal grade | | 0 | | | 2,572 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,572 | | 3-4 internal grade | | — | | | 2,599 | | | — | | | — | | | — | | | 2,599 | |
Loans and notes receivable | Loans and notes receivable | | $ | 1,361 | | | $ | 4,575 | | | $ | 23,843 | | | $ | 11,731 | | | $ | 216 | | | $ | 4,135 | | | $ | 45,861 | | Loans and notes receivable | | $ | 1,256 | | | $ | 3,096 | | | $ | 7,187 | | | $ | 11,705 | | | $ | 1,322 | | | $ | 24,566 | |
Changes in prepaid product discounts during the nine months ended September 30, 20202021 and 20192020 were as follows:
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
Balance, beginning of year | Balance, beginning of year | | $ | 51,145 | | | $ | 54,642 | | Balance, beginning of year | | $ | 50,602 | | | $ | 51,145 | |
Additions(1) | Additions(1) | | 13,259 | | | 15,275 | | Additions(1) | | 24,284 | | | 13,259 | |
Amortization | Amortization | | (21,725) | | | (17,861) | | Amortization | | (23,425) | | | (21,725) | |
Other | Other | | (1,430) | | | (308) | | Other | | (191) | | | (1,430) | |
Balance, end of period | Balance, end of period | | $ | 41,249 | | | $ | 51,748 | | Balance, end of period | | $ | 51,270 | | | $ | 41,249 | |
(1) Prepaid product discounts are generally accrued upon contract execution. Cash payments for prepaid product discounts were $27,049 for the nine months ended September 30, 2021 and $24,947 for the nine months ended September 30, 2020 and $20,370 for the nine months ended September 30, 2019.2020.
Accrued liabilities – Accrued liabilities were comprised of the following:
| (in thousands) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | September 30, 2021 | | December 31, 2020 |
Deferred revenue(1) | Deferred revenue(1) | | $ | 37,933 | | | $ | 46,098 | | Deferred revenue(1) | | $ | 43,081 | | | $ | 42,104 | |
Employee cash bonuses | | 24,980 | | | 36,918 | | |
Wages | | 14,261 | | | 6,937 | | |
Operating lease liabilities | | 12,769 | | | 12,898 | | |
Employee cash bonuses, including sales incentives | | Employee cash bonuses, including sales incentives | | 35,341 | | | 21,090 | |
Operating lease liabilities (Note 13) | | Operating lease liabilities (Note 13) | | 12,884 | | | 11,589 | |
Prepaid product discounts due within one year | Prepaid product discounts due within one year | | 6,028 | | | 14,709 | | Prepaid product discounts due within one year | | 11,805 | | | 14,365 | |
Customer rebates | | Customer rebates | | 8,715 | | | 8,179 | |
Other | Other | | 65,571 | | | 61,778 | | Other | | 91,958 | | | 79,856 | |
Accrued liabilities | Accrued liabilities | | $ | 161,542 | | | $ | 179,338 | | Accrued liabilities | | $ | 203,784 | | | $ | 177,183 | |
(1) $37,41133,088 of the December 31, 20192020 amount was recognized as revenue during the nine months ended September 30, 2020.2021.
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) | (in thousands) | | September 30, 2020 | | September 30, 2019 | (in thousands) | | September 30, 2021 | | September 30, 2020 |
Cash and cash equivalents | Cash and cash equivalents | | $ | 310,430 | | | $ | 73,472 | | Cash and cash equivalents | | $ | 121,064 | | | $ | 310,430 | |
Restricted cash and restricted cash equivalents included in funds held for customers | Restricted cash and restricted cash equivalents included in funds held for customers | | 89,586 | | | 78,639 | | Restricted cash and restricted cash equivalents included in funds held for customers | | 129,180 | | | 89,586 | |
Non-current restricted cash included in other non-current assets | | Non-current restricted cash included in other non-current assets | | 2,860 | | | — | |
Total cash, cash equivalents, restricted cash and restricted cash equivalents | Total cash, cash equivalents, restricted cash and restricted cash equivalents | | $ | 400,016 | | | $ | 152,111 | | Total cash, cash equivalents, restricted cash and restricted cash equivalents | | $ | 253,104 | | | $ | 400,016 | |
| | |
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) per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted earnings (loss) per share because their effect would have been antidilutive.
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share amounts) | (in thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands, except per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 |
Earnings (loss) per share – basic: | Earnings (loss) per share – basic: | | | | | | | | Earnings (loss) per share – basic: | | | | | | | |
Net income (loss) | Net income (loss) | | $ | 29,444 | | | $ | (318,493) | | | $ | (15,809) | | | $ | (244,721) | | Net income (loss) | | $ | 12,501 | | | $ | 29,444 | | | $ | 48,955 | | | $ | (19,373) | |
Net income attributable to non-controlling interest | Net income attributable to non-controlling interest | | (27) | | | 0 | | | (46) | | | 0 | | Net income attributable to non-controlling interest | | (37) | | | (27) | | | (99) | | | (46) | |
Net income (loss) attributable to Deluxe | Net income (loss) attributable to Deluxe | | 29,417 | | | (318,493) | | | (15,855) | | | (244,721) | | Net income (loss) attributable to Deluxe | | 12,464 | | | 29,417 | | | 48,856 | | | (19,419) | |
Income allocated to participating securities | Income allocated to participating securities | | (24) | | | (24) | | | (42) | | | (79) | | Income allocated to participating securities | | (9) | | | (24) | | | (36) | | | (42) | |
Income (loss) attributable to Deluxe available to common shareholders | Income (loss) attributable to Deluxe available to common shareholders | | $ | 29,393 | | | $ | (318,517) | | | $ | (15,897) | | | $ | (244,800) | | Income (loss) attributable to Deluxe available to common shareholders | | $ | 12,455 | | | $ | 29,393 | | | $ | 48,820 | | | $ | (19,461) | |
Weighted-average shares outstanding | Weighted-average shares outstanding | | 41,872 | | | 42,533 | | | 41,927 | | | 43,312 | | Weighted-average shares outstanding | | 42,574 | | | 41,872 | | | 42,294 | | | 41,927 | |
Earnings (loss) per share – basic | Earnings (loss) per share – basic | | $ | 0.70 | | | $ | (7.49) | | | $ | (0.38) | | | $ | (5.65) | | Earnings (loss) per share – basic | | $ | 0.29 | | | $ | 0.70 | | | $ | 1.15 | | | $ | (0.46) | |
| Earnings (loss) per share – diluted: | Earnings (loss) per share – diluted: | | | | | | Earnings (loss) per share – diluted: | | | | | |
Net income (loss) | Net income (loss) | | $ | 29,444 | | | $ | (318,493) | | | $ | (15,809) | | | $ | (244,721) | | Net income (loss) | | $ | 12,501 | | | $ | 29,444 | | | $ | 48,955 | | | $ | (19,373) | |
Net income attributable to non-controlling interest | Net income attributable to non-controlling interest | | (27) | | | 0 | | | (46) | | | 0 | | Net income attributable to non-controlling interest | | (37) | | | (27) | | | (99) | | | (46) | |
Net income (loss) attributable to Deluxe | Net income (loss) attributable to Deluxe | | 29,417 | | | (318,493) | | | (15,855) | | | (244,721) | | Net income (loss) attributable to Deluxe | | 12,464 | | | 29,417 | | | 48,856 | | | (19,419) | |
Income allocated to participating securities | Income allocated to participating securities | | 0 | | | (24) | | | (42) | | | (79) | | Income allocated to participating securities | | (9) | | | — | | | (27) | | | (42) | |
Re-measurement of share-based awards classified as liabilities | Re-measurement of share-based awards classified as liabilities | | 0 | | | 0 | | | (794) | | | 0 | | Re-measurement of share-based awards classified as liabilities | | (329) | | | — | | | (329) | | | (794) | |
Income (loss) attributable to Deluxe available to common shareholders | Income (loss) attributable to Deluxe available to common shareholders | | $ | 29,417 | | | $ | (318,517) | | | $ | (16,691) | | | $ | (244,800) | | Income (loss) attributable to Deluxe available to common shareholders | | $ | 12,126 | | | $ | 29,417 | | | $ | 48,500 | | | $ | (20,255) | |
Weighted-average shares outstanding | Weighted-average shares outstanding | | 41,872 | | | 42,533 | | | 41,927 | | | 43,312 | | Weighted-average shares outstanding | | 42,574 | | | 41,872 | | | 42,294 | | | 41,927 | |
Dilutive impact of potential common shares | Dilutive impact of potential common shares | | 119 | | | 0 | | | 40 | | | 0 | | Dilutive impact of potential common shares | | 457 | | | 119 | | | 453 | | | 40 | |
Weighted-average shares and potential common shares outstanding | Weighted-average shares and potential common shares outstanding | | 41,991 | | | 42,533 | | | 41,967 | | | 43,312 | | Weighted-average shares and potential common shares outstanding | | 43,031 | | | 41,991 | | | 42,747 | | | 41,967 | |
Earnings (loss) per share – diluted | Earnings (loss) per share – diluted | | $ | 0.70 | | | $ | (7.49) | | | $ | (0.40) | | | $ | (5.65) | | Earnings (loss) per share – diluted | | $ | 0.28 | | | $ | 0.70 | | | $ | 1.13 | | | $ | (0.48) | |
Antidilutive options excluded from calculation | Antidilutive options excluded from calculation | | 2,086 | | | 1,422 | | | 2,160 | | | 1,422 | | Antidilutive options excluded from calculation | | 2,314 | | | 2,086 | | | 2,314 | | | 2,160 | |
| | |
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) was as follows:
| Accumulated other comprehensive loss components | Accumulated other comprehensive loss components | | Amounts reclassified from accumulated other comprehensive loss | | Affected line item in consolidated statements of comprehensive income (loss) | 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, | | | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | |
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) | |
Realized loss on interest rate swap | | Realized loss on interest rate swap | | $ | (371) | | | $ | (326) | | | $ | (1,035) | | | $ | (514) | | | Interest expense |
Tax benefit | | Tax benefit | | 97 | | | 85 | | | 271 | | | 134 | | | Income tax provision |
Realized loss on interest rate swap, net of tax | | Realized loss on interest rate swap, net of tax | | (274) | | | (241) | | | (764) | | | (380) | | | Net income (loss) |
Amortization of postretirement benefit plan items: | Amortization of postretirement benefit plan items: | | | | | | | | | | Amortization of postretirement benefit plan items: | | | | | | | | | |
Prior service credit | Prior service credit | | 355 | | | 355 | | | 1,066 | | | 1,066 | | | Other income | Prior service credit | | 355 | | | 355 | | | 1,066 | | | 1,066 | | | Other income |
Net actuarial loss | Net actuarial loss | | (575) | | | (806) | | | (1,725) | | | (2,417) | | | Other income | Net actuarial loss | | (407) | | | (575) | | | (1,221) | | | (1,725) | | | Other income |
Total amortization | Total amortization | | (220) | | | (451) | | | (659) | | | (1,351) | | | Other income | Total amortization | | (52) | | | (220) | | | (155) | | | (659) | | | Other income |
Tax benefit | | 12 | | | 70 | | | 35 | | | 209 | | | Income tax (provision) benefit | |
Tax (expense) benefit | | Tax (expense) benefit | | (30) | | | 12 | | | (93) | | | 35 | | | Income tax provision |
Amortization of postretirement benefit plan items, net of tax | Amortization of postretirement benefit plan items, net of tax | | (208) | | | (381) | | | (624) | | | (1,142) | | | Net income (loss) | Amortization of postretirement benefit plan items, net of tax | | (82) | | | (208) | | | (248) | | | (624) | | | Net income (loss) |
Total reclassifications, net of tax | Total reclassifications, net of tax | | $ | (449) | | | $ | (321) | | | $ | (1,004) | | | $ | (1,082) | | | Total reclassifications, net of tax | | $ | (356) | | | $ | (449) | | | $ | (1,012) | | | $ | (1,004) | | |
Accumulated other comprehensive loss – Changes in the components of accumulated other comprehensive loss during the nine months ended September 30, 20202021 were as follows:
| (in thousands) | (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 | (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) | | |
Balance, December 31, 2020 | | Balance, December 31, 2020 | | $ | (21,956) | | | $ | (90) | | | $ | (5,351) | | | $ | (14,036) | | | $ | (41,433) | |
Other comprehensive (loss) income before reclassifications | | Other comprehensive (loss) income before reclassifications | | — | | | (208) | | | 1,077 | | | (679) | | | 190 | |
Amounts reclassified from accumulated other comprehensive loss | Amounts reclassified from accumulated other comprehensive loss | | 624 | | | 0 | | | 380 | | | 0 | | | 1,004 | | Amounts reclassified from accumulated other comprehensive loss | | 248 | | | — | | | 764 | | | — | | | 1,012 | |
Net current-period other comprehensive income (loss) | Net current-period other comprehensive income (loss) | | 624 | | | 314 | | | (4,860) | | | (1,035) | | | (4,957) | | Net current-period other comprehensive income (loss) | | 248 | | | (208) | | | 1,841 | | | (679) | | | 1,202 | |
Balance, September 30, 2020 | | $ | (27,782) | | | $ | 39 | | | $ | (5,957) | | | $ | (19,204) | | | $ | (52,904) | | |
Balance, September 30, 2021 | | Balance, September 30, 2021 | | $ | (21,708) | | | $ | (298) | | | $ | (3,510) | | | $ | (14,715) | | | $ | (40,231) | |
(1)Other comprehensive income before reclassifications is net of income tax expense of $110.
(2) Other comprehensive loss before reclassifications is net of an income tax benefit of $1,840.$72.
(2) Other comprehensive income before reclassifications is net of income tax expense of $382.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
On June 1, 2021, we acquired all of the equity of First American in a cash transaction for $956,717, net of cash, cash equivalents, restricted cash and restricted cash equivalents acquired, subject to customary adjustments under the terms of the acquisition agreement. First American is a large-scale payments technology company that provides partners and merchants with comprehensive in-store, online and mobile payment solutions. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed resulted in non-tax deductible goodwill of $732,520. The transaction resulted in goodwill as First American provides an end-to-end payments technology platform, which we believe will provide significant leverage to accelerate organic growth.
The acquisition was funded with cash on hand and proceeds from new debt. Information regarding our debt can be found in Note 12. The goodwill and results of operations of First American from the date of acquisition are included in the Payments segment.
The acquisition was accounted for as a business combination and the preliminary allocation of the purchase price to the assets acquired and liabilities assumed was based upon preliminary valuations performed to determine the fair values of the acquired items as of the acquisition date. The valuations, particularly as they relate to intangible assets, are preliminary. They may be adjusted for up to one year after the closing date to reflect final valuations, as we continue to evaluate the various inputs utilized in the valuations. During the quarter ended September 30, 2021, we recorded measurement-period adjustments that included a $3,788 decrease in goodwill and a $3,694 increase in internal-use software. The following illustrates the preliminary allocation of the purchase price, as of September 30, 2021, to the assets acquired and liabilities assumed:
| | | | | | | | |
(in thousands) | | Purchase price allocation |
Accounts receivable | | $ | 27,296 | |
Other current assets | | 8,533 | |
Property, plant and equipment | | 9,873 | |
Operating lease assets | | 24,396 | |
Intangible assets: | | |
Customer relationships | | 118,000 | |
Partner relationships | | 67,000 | |
Technology-based intangibles | | 66,000 | |
Trade names | | 22,000 | |
Internal-use software | | 6,111 | |
Total intangible assets | | 279,111 | |
Goodwill | | 732,520 | |
Other non-current assets | | 350 | |
Accounts payable | | (18,475) | |
Funds held for customers | | (9,428) | |
Accrued liabilities | | (20,551) | |
Operating lease liabilities, non-current | | (21,316) | |
Deferred income taxes | | (51,216) | |
Other non-current liabilities | | (4,376) | |
Payment for acquisition, net of cash, cash equivalents, restricted cash and restricted cash equivalents acquired of $15,841 | | $ | 956,717 | |
Information regarding the useful lives of the acquired intangibles can be found in Note 3. Information regarding the calculation of the estimated fair values of the acquired intangibles can be found in Note 8.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Our results of operations for the quarter ended September 30, 2021 included revenue of $82,485 and net income of $890 from the operations of First American. Our results of operations for the nine months ended September 30, 2021 included revenue of $109,828 and net income of $824 from the operations of First American. In addition, we incurred acquisition transaction costs of $208 for the quarter ended September 30, 2021 and $18,816 for the nine months ended September 30, 2021, which were included in SG&A expense in the consolidated statements of comprehensive income.
The following unaudited pro forma financial information summarizes our consolidated results of operations as though the acquisition occurred on January 1, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pro Forma Statements of Comprehensive Income (Loss) |
| | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | | | 2020 | | 2021 | | 2020 |
Revenue | | | | $ | 628,356 | | | $ | 1,613,333 | | | $ | 1,664,644 | |
Net income (loss) attributable to Deluxe | | | | 21,694 | | | 50,176 | | | (58,565) | |
The unaudited pro forma financial information was prepared in accordance with our accounting policies, which can be found under the caption "Note 1: Significant Accounting Policies" in the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K. The pro forma information includes adjustments to reflect the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from January 1, 2020, with the consequential tax effects. The pro forma information also includes adjustments to reflect the additional interest expense on the debt we issued to fund the acquisition (Note 12). The acquisition transaction costs we incurred are reflected in the pro forma results for the nine months ended September 30, 2020.
This pro forma financial information is for informational purposes only. It does not reflect the integration of the businesses or any synergies that may result from the acquisition. As such, it is not indicative of the results of operations that would have been achieved had the acquisition been consummated on January 1, 2020. In addition, the pro forma amounts are not indicative of future operating results.
| | |
NOTE 6:7: DERIVATIVE FINANCIAL INSTRUMENTS |
As part of our interest rate risk management strategy, in July 2019, we entered into an interest rate swap in July 2019, 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 facilityvariable-rate debt (Note 11)12). 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 sheets and are subsequently reclassified to interest expense as interest payments are made on the variable-rate debt. The fair value of the interest rate swap was $8,046$4,716 as of September 30, 20202021 and $1,480$7,210 as of December 31, 20192020 and was included in other non-current liabilities on the consolidated balance 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, 20202021 and December 31, 20192020 and its impact on consolidated net income (loss) and our consolidated statements of cash flows was not significant. We also do not expect the amount to be reclassified to interest expense over the next 12 months to be significant.
| | |
NOTE 7:8: FAIR VALUE MEASUREMENTS |
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 policypolicies on impairment of goodwill and indefinite-lived intangible assets and impairment of long-lived assets and amortizable intangibles is includedexplain our methodology for assessing impairment of these assets and can be found under the caption "Note 1: Significant Accounting Policies" in the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K and explains our methodology for assessing impairment of these assets.10-K.
FirstSecond quarter 20202021 goodwill impairment analyses – Effective January 1, 2020, we reorganized our reportable business segments to align with structural and management reporting changes in support of our growth strategy (Note 14). As a result we reassessedof changes in our previously determinedfinancial management reporting units andprocess during the second quarter of 2021, we 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 ourthe reporting units with the exception of our Direct-to-Consumer reporting unit, which is part of our new Checks reportable business segment.goodwill. 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%.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
The realignment of our reporting units, effective April 1, 2021, did not change the reporting units within our Cloud Solutions or Checks segments. Within our Payments segment, the number of reporting units increased from 1 to 4, and within our Promotional Solutions segment, the number of reporting units increased from 1 to 2. Upon completing the realignment, 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 analysisqualitative analyses for the reporting units that changed as a result of the realignment. This quantitativeand to which goodwill was assigned. We determined that it was appropriate to perform qualitative assessments, given that our analysis as of January 1, 2020, indicated that the estimatedchange in reporting units did not mask or prevent an impairment that existed at the time of the change. In completing the qualitative assessments, we noted no changes in events or circumstances that indicated that it was more likely than not that the fair valuesvalue of any reporting unit was less than its carrying amount. As such, no goodwill impairment charges were recorded during the quarter ended June 30, 2021.
2021 annual goodwill impairment analyses – In completing the 2021 annual impairment analysis of goodwill as of July 31, 2021, we elected to perform qualitative analyses for all of our reporting units exceeded their carrying values by approximate amounts between $37,000 and $954,000, or by amounts between 121% and 189% above the carrying values of their net assets.
On January 30, 2020, the World Health Organization (WHO) announced a global health emergency dueunits. These qualitative analyses evaluated factors, including, but not limited 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 and the overall financial performance of the reporting units. We also considered the most recent quantitative analyses completed in prior periods. In completing these assessments, we noted no changes in events or circumstances that indicated that it was more likely than not that the fair values of our reporting units andwere less than their carrying amounts.
2020 asset impairment charges – During the last quantitative analyses we completed,quarter ended March 31, 2020, we concluded that a triggering event had occurred for 2 of our reporting units.units as a result of the COVID-19 pandemic. As such, we completed quantitative goodwill impairment analyses for our Promotional Solutions and Cloud Solutions Web Hostingthese 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$67,132 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$59,009 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 either reporting unit was less than its carrying amount.
We elected to perform quantitative analyses for our other 2 reporting units: Cloud Data Analytics and Promotional Solutions. These quantitative analyses indicated that the estimated fair values of these reporting units exceeded their carrying values by approximately $100,000 and $210,000, or by 63% and 132% above the carrying values of their net assets. As such, 0 goodwill impairment charges were recordedAlso as a result of our annual impairment analysis.
Other nonrecurring asset impairment analyses – As a result of the impacts of the COVID-19 pandemic, we assessed for impairment 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 asset impairment charges of $17,678, primarily related to certain customer list, software and trade name intangible assets. With the exception of certain internal-use software assets, we determined that the assets were fully impaired. We utilized the discounted value of estimated future cash flows to estimate the fair value of the asset group. 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 of the asset group as of September 30, 2020, we assumed 0no revenue growth, a 1.0 point improvement in gross margin and a discount rate of 11%.
Also during the first nine months ofended September 30, 2020, we recorded asset impairment charges of $7,514, primarily related primarily to the rationalization of our real estate footprint, as well as internal-use software held for sale as of December 31, 2019.and a small business customer list. 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, 2020.
Asset impairment analyses completed during the nine months ended September 30, 2020 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 | |
Recurring fair value measurements – Cash and cash equivalents as of September 30, 2020 included investments in money market funds that have been designated as trading securities. Because of the short-term nature of the underlying investments, the cost of these funds approximates their fair values.
Funds held for customers included available-for-sale debt securities (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) |
Information regarding the asset impairment analyses completed during the nine months ended September 30, 2020 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) | |
Intangible assets (Cloud Solutions Web Hosting reporting unit)(1) | | $ | 2,172 | | | $ | — | | | $ | — | | | $ | 2,172 | | | $ | 17,678 | |
Small business distributor | | 4,479 | | | — | | | — | | | 4,479 | | | 5,108 | |
Other assets | | 11,210 | | | — | | | — | | | 11,210 | | | 7,514 | |
Goodwill(2) | | | | | | | | | | 71,449 | |
Total | | | | | | | | | | $ | 101,749 | |
(1) The impairment charge consisted of $8,397 related to customer lists, $6,932 related to internal-use software and $2,349 related to other intangible assets.
(2) Amount presented here has been revised from what was previously reported to correct the error described in Note 1.
Business combination – On June 1, 2021, we acquired all of the equity of First American (Note 6). For all acquisitions, we are required to measure the fair value of the net identifiable tangible and intangible assets and liabilities acquired. The identifiable net assets acquired were comprised primarily of intangible assets, accounts receivable and operating lease assets and liabilities. The fair values of the customer relationship and partner relationship intangibles were estimated using the multi-period excess earnings method. This valuation model estimates revenues and cash flows derived from the asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as a trade name or technology, that contributed to the generation of the cash flows. The resulting cash flow, which is attributable solely to the customer relationship or partner relationship asset, is then discounted at a rate of return commensurate with the risk of the asset to calculate a present value. Key assumptions used in the calculations included same-customer revenue and partner growth rates, estimated earnings, estimated customer and partner retention rates based on First American's historical information and the discount rate.
The estimated fair values of the acquired trade names and technology-based intangibles were estimated using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates were applied to projected revenue for the estimated remaining useful lives of the assets to estimate the royalty savings. Royalty rates are selected based on the attributes of the asset, including its recognition and reputation in the industry, and in the case of trade names, with consideration of the specific profitability of the products sold under a trade name and supporting assets.
The fair value of acquired accounts receivable approximates the gross contractual amounts receivable and we expect to collect all acquired receivables. The fair value of the acquired operating lease liabilities was estimated as if the leases were new. As such, we reassessed the lease term, the discount rate and the lease payments. The fair value of the related operating lease assets was measured at the same amount as the lease liability, adjusted to reflect favorable or unfavorable terms of the lease as compared to market terms.
Recurring fair value measurements – Funds held for customers included available-for-sale debt securities (Note 3). These securities included a mutual fund investment that invests in Canadian and provincial government securities and investmentsan investment in a Canadian guaranteed investment certificates (GICs)certificate (GIC) with maturitiesa maturity of 1 to 2 years. The costAs of theDecember 31, 2020, our debt securities also included a money market fund approximates its fair value because of the short-term nature of the investment.that was traded in an active market. The mutual fund investment is not traded in an active market and its fair value is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. The cost of the GIC approximates its fair value, based on estimates using current market rates offered for deposits with similar remaining maturities. The cost of the money market fund approximated its fair value because of the short-term nature of the investment. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss on the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue on the consolidated statements of comprehensive income (loss) and were not significant forduring the quarters or nine months ended September 30, 20202021 and 2019.
2020.
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 | |
| | |
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 | |
Information regarding the fair values of our financial instruments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair value measurements using |
| | | | September 30, 2021 | | 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): | | | | | | | | | | | | |
Available-for-sale debt securities | | Funds held for customers | | 13,302 | | | 13,302 | | | — | | | 13,302 | | | — | |
Derivative liability (Note 7) | | Other non-current liabilities | | (4,716) | | | (4,716) | | | — | | | (4,716) | | | — | |
Amortized cost: | | | | | | | | | | | | |
Cash | | Cash and cash equivalents | | 121,064 | | | 121,064 | | | 121,064 | | | — | | | — | |
Cash | | Funds held for customers | | 129,180 | | | 129,180 | | | 129,180 | | | — | | | — | |
Loans and notes receivable from distributors | | Other current and non-current assets | | 21,729 | | | 21,683 | | | — | | | — | | | 21,683 | |
Long-term debt | | Current portion of long-term debt and long-term debt | | 1,776,167 | | | 1,821,713 | | | — | | | 1,821,713 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair value measurements using |
| | | | December 31, 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 | | Funds held for customers | | $ | 15,000 | | | $ | 15,000 | | | $ | 15,000 | | | $ | — | | | $ | — | |
Available-for-sale debt securities | | Funds held for customers | | 13,462 | | | 13,462 | | | — | | | 13,462 | | | — | |
Derivative liability (Note 7) | | Other non-current liabilities | | (7,210) | | | (7,210) | | | — | | | (7,210) | | | — | |
Amortized cost: | | | | | | | | | | | | |
Cash | | Cash and cash equivalents | | 123,122 | | | 123,122 | | | 123,122 | | | — | | | — | |
Cash | | Funds held for customers | | 91,287 | | | 91,287 | | | 91,287 | | | — | | | — | |
Loans and notes receivable from distributors | | Other current and non-current assets | | 37,076 | | | 36,950 | | | — | | | — | | | 36,950 | |
Long-term debt | | Long-term debt | | 840,000 | | | 840,000 | | | — | | | 840,000 | | | — | |
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
| | |
NOTE 8:9: RESTRUCTURING AND INTEGRATION EXPENSE |
Restructuring and integration expense consists of costs related to the consolidation and migration of certain applications and processes, including our financial sales and human resourcessales management systems. It also includes costs related to the integration of acquired businesses into our systems and processes and the rationalization of our real estate footprint.processes. These costs consist primarily of information technology consulting, project management services and internal labor, as well as other miscellaneous costs associated with our initiatives, such as training, travel and relocation.relocation and costs associated with facility closures. In addition, we recorded employee severance costs related to these initiatives, as well as our ongoing cost reduction initiatives across functional areas. We are currently pursuing several initiatives designed to focus our business behindsupport our growth strategiesstrategy 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, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Total cost of revenue | Total cost of revenue | | $ | (26) | | | $ | 1,419 | | | $ | 831 | | | $ | 2,365 | | Total cost of revenue | | $ | 1,559 | | | $ | (26) | | | $ | 3,073 | | | $ | 831 | |
Operating expenses | Operating expenses | | 18,949 | | | 26,255 | | | 56,957 | | | 49,089 | | Operating expenses | | 12,335 | | | 18,949 | | | 38,012 | | | 56,957 | |
Restructuring and integration expense | Restructuring and integration expense | | $ | 18,923 | | | $ | 27,674 | | | $ | 57,788 | | | $ | 51,454 | | Restructuring and integration expense | | $ | 13,894 | | | $ | 18,923 | | | $ | 41,085 | | | $ | 57,788 | |
| | |
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
Restructuring and integration expense for each period was comprised of the following:
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
External consulting fees | External consulting fees | | $ | 14,898 | | | $ | 15,820 | | | $ | 37,136 | | | $ | 28,066 | | External consulting fees | | $ | 6,432 | | | $ | 14,898 | | | $ | 19,355 | | | $ | 37,136 | |
Internal labor | | Internal labor | | 1,756 | | | 2,218 | | | 6,276 | | | 5,200 | |
Employee severance benefits | Employee severance benefits | | 752 | | | 5,033 | | | 10,870 | | | 9,794 | | Employee severance benefits | | 1,293 | | | 752 | | | 3,167 | | | 10,870 | |
Internal labor | | 2,218 | | | 3,078 | | | 5,200 | | | 8,927 | | |
Other | Other | | 1,055 | | | 3,743 | | | 4,582 | | | 4,667 | | Other | | 4,413 | | | 1,055 | | | 12,287 | | | 4,582 | |
Restructuring and integration expense | Restructuring and integration expense | | $ | 18,923 | | | $ | 27,674 | | | $ | 57,788 | | | $ | 51,454 | | Restructuring and integration expense | | $ | 13,894 | | | $ | 18,923 | | | $ | 41,085 | | | $ | 57,788 | |
Our restructuring and integration accruals are included in accrued liabilities on the consolidated balance sheets and represent expected cash payments required to satisfy the remaining severance obligations to those employees already terminated and those expected to be terminated under our various initiatives. These accruals are included in accrued liabilities on the consolidated balance sheets. The majority of the related employee reductions are expected to be completed byin the firstfourth quarter of 2021, and we expect most of the related severance payments to be paid in the first half of 2021,by early 2022, utilizing cash from operations.
Changes in our restructuring and integration accruals were as follows:
| | | | | | | | |
(in thousands) | | Employee severance benefits |
Balance, December 31, 20192020 | | $ | 3,4596,798 | |
Charges | | 11,5874,690 | |
Reversals | | (717)(1,523) | |
Payments | | (11,985)(8,632) | |
Balance, September 30, 20202021 | | $ | 2,3441,333 | |
The charges and reversals presented in the rollforward of our restructuring and integration accruals do not include items charged directly to expense as incurred, as those items are not reflected in accrued liabilities on the consolidated balance sheets.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
| | |
NOTE 9:10: INCOME TAX PROVISION (BENEFIT) |
The effective tax rate on pre-tax losspretax income (loss) reconciles to the U.S. federal statutory tax rate as follows:
| | | Nine Months Ended September 30, 2020 | | Year Ended December 31, 2019 | | Nine Months Ended September 30, 2021 | | Year Ended December 31, 2020(1) |
Income tax at federal statutory rate | Income tax at federal statutory rate | | 21.0 | % | | 21.0 | % | 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 | %) | |
Goodwill impairment charges (Note 8) | | Goodwill impairment charges (Note 8) | | — | | | 46.8 | % |
State income tax expense, net of federal income tax benefit | | State income tax expense, net of federal income tax benefit | | 3.1 | % | | 2.1 | % |
Non-deductible acquisition costs | | Non-deductible acquisition costs | | 2.8 | % | | — | |
Non-deductible executive compensation | | Non-deductible executive compensation | | 1.7 | % | | 2.2 | % |
Foreign tax rate differences | | Foreign tax rate differences | | 1.2 | % | | 4.3 | % |
Tax impact of share-based compensation | | Tax impact of share-based compensation | | 0.8 | % | | 8.5 | % |
Change in unrecognized tax benefits, including interest and penalties | | Change in unrecognized tax benefits, including interest and penalties | | 0.4 | % | | (3.3 | %) |
Research and development tax credit | Research and development tax credit | | (3.3 | %) | | 0.6 | % | Research and development tax credit | | (0.8 | %) | | (3.7 | %) |
Payables and receivables for prior year tax returns | | Payables and receivables for prior year tax returns | | (0.3 | %) | | 3.2 | % |
Non-taxable income from employee life insurance policies | | Non-taxable income from employee life insurance policies | | (0.3 | %) | | (1.1 | %) |
Return to provision adjustments | | Return to provision adjustments | | (0.1 | %) | | (2.6 | %) |
Change in valuation allowances | Change in valuation allowances | | 0 | | | (4.5 | %) | Change in valuation allowances | | — | | | 0.9 | % |
Foreign tax rate differences | | 4.5 | % | | 1.3 | % | |
State income tax expense, net of federal income tax benefit | | 0.2 | % | | 4.9 | % | |
Other | Other | | (16.4 | %) | | (0.6 | %) | Other | | 0.2 | % | | 1.8 | % |
Effective tax rate | Effective tax rate | | (754.1 | %) | | (7.7 | %) | Effective tax rate | | 29.7 | % | | 80.1 | % |
(1) Amounts presented here have been revised from what was previously reported in the 2020 Form 10-K to correct the error described in Note 1.
| | |
NOTE 10:11: POSTRETIREMENT BENEFITS |
We have historically provided certain health care benefits for a large number of retired U.S. employees. In addition to our retiree health care plan, we also have a U.S. supplemental executive retirement plan. Further information regarding our postretirement benefit plans can be found under the caption “Note 14: Postretirement Benefits” in the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
Postretirement benefit income is included in other income on the consolidated statements of comprehensive income (loss) and consisted of the following components:
| | | Quarter Ended September 30, | | Nine Months Ended September 30, | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Interest cost | Interest cost | | $ | 478 | | | $ | 682 | | | $ | 1,434 | | | $ | 2,046 | | Interest cost | | $ | 242 | | | $ | 478 | | | $ | 726 | | | $ | 1,434 | |
Expected return on plan assets | Expected return on plan assets | | (1,905) | | | (1,740) | | | (5,714) | | | (5,218) | | Expected return on plan assets | | (1,875) | | | (1,905) | | | (5,623) | | | (5,714) | |
Amortization of prior service credit | Amortization of prior service credit | | (355) | | | (355) | | | (1,066) | | | (1,066) | | Amortization of prior service credit | | (355) | | | (355) | | | (1,066) | | | (1,066) | |
Amortization of net actuarial losses | Amortization of net actuarial losses | | 575 | | | 806 | | | 1,725 | | | 2,417 | | Amortization of net actuarial losses | | 407 | | | 575 | | | 1,221 | | | 1,725 | |
Net periodic benefit income | Net periodic benefit income | | $ | (1,207) | | | $ | (607) | | | $ | (3,621) | | | $ | (1,821) | | Net periodic benefit income | | $ | (1,581) | | | $ | (1,207) | | | $ | (4,742) | | | $ | (3,621) | |
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Debt outstanding was comprised of the following:
| | | | | | | | | | | | | | |
(in thousands) | | September 30, 2021 | | December 31, 2020 |
Senior, secured term loan facility | | $ | 1,116,563 | | | $ | — | |
Senior, unsecured notes | | 500,000 | | | — | |
Amounts drawn on senior, secured revolving credit facility | | 180,000 | | | 840,000 | |
Total principal amount | | 1,796,563 | | | 840,000 | |
Less: unamortized discount and debt issuance costs | | (20,396) | | | — | |
Total debt, net of discount and debt issuance costs | | 1,776,167 | | | 840,000 | |
Less: current portion of long-term debt, net of debt issuance costs | | (57,167) | | | — | |
Long-term debt | | $ | 1,719,000 | | | $ | 840,000 | |
Maturities of long-term debt were as follows as of September 30, 2021:
| | | | | | | | |
(in thousands) | | Debt obligations |
Remainder of 2021 | | $ | 14,438 | |
2022 | | 57,750 | |
2023 | | 72,188 | |
2024 | | 86,625 | |
2025 | | 101,062 | |
Thereafter | | 1,464,500 | |
Total principal amount | | $ | 1,796,563 | |
Credit facility – Debt outstanding as of December 31, 2020 consisted of amounts drawn on our previous revolving credit facility. In June 2021, we executed a new credit agreement that provides for a 5-year revolving credit facility with commitments of $1,040,000 as$500,000 and a term loan facility in the amount of September 30, 2020$1,155,000. The revolving credit facility includes a $40,000 swingline sub-facility and $883,500 asa $25,000 letter of December 31, 2019. In March 2020, in conjunctioncredit sub-facility. Our previous credit facility agreement was terminated contemporaneously with our response toentry into the COVID-19 pandemic, we drew an additional $238,000 on ournew credit agreement and was repaid utilizing proceeds from the new credit facility. We also utilized the proceeds from the new credit facility due to uncertaintycomplete the acquisition of First American in how the commercial capitalJune 2021 (Note 6) and credit markets would operate during the pandemic. During July 2020, we repaid $100,000 of the amount drawn under the credit facility, and in October 2020, we repaid an additional $140,000. As of September 30, 2020, we held cash and cash equivalents of $310,430.to pay related debt issuance costs.
As of September 30, 2020,Loans under the total availability under our revolving credit facility was $1,150,000.may be borrowed, repaid and re-borrowed until June 1, 2026, at which time all amounts borrowed must be repaid. The term loan facility will be repaid in equal quarterly installments of $14,438 from September 30, 2021 through June 30, 2023, $21,656 from September 30, 2023 through June 30, 2025, and $28,875 from September 30, 2025 through March 31, 2026. The remaining balance is due on June 1, 2026. The term loan facility also includes an accordion feature allowing us,mandatory prepayment requirements related to asset sales, new debt (other than permitted debt) and excess cash flow, subject to lender consent,certain limitations. No premium or penalty is payable in connection with any mandatory or voluntary prepayment of the term loan facility.
Interest is payable on the senior, secured credit facility at a fluctuating rate of interest determined by reference to increasethe eurodollar rate plus an applicable margin ranging from 1.5% to 2.5%, depending on our consolidated total leverage ratio, as defined in the credit agreement. A commitment to an aggregate amount not exceeding $1,425,000. Thefee is payable on the unused portion of the revolving credit facility matures in March 2023. Our quarterly commitment fee rangesat a rate ranging from 0.175%0.25% to 0.35%, baseddepending on our consolidated total leverage ratio. Amounts drawnoutstanding under theour credit facilityfacilities had a weighted-average interest rate of 1.93%2.63% as of September 30, 20202021 and 3.03%2.01% as of December 31, 2019. In July 2019, we executed2020, including the impact of an interest rate swap to convertthat effectively converts $200,000 of the amount drawn under the credit facilityour variable-rate debt to fixed rate debt. Further information regarding the interest rate swap can be found in Note 6.7.
Borrowings under the credit agreementfacility are collateralized by substantially all of our personalthe present and future tangible and intangible property.personal property held by us and our subsidiaries that have guaranteed our obligations under the credit facility, subject to certain exceptions. 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 coursedispositions, changes in business, advances, investments, loans and restricted payments. The covenants are subject to a number of business,limitations and change in control as definedexceptions set forth in the credit agreement. The credit agreement also requires us to maintain certain financial ratios, including a maximumincludes
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
requirements regarding our consolidated total leverage ratio of 3.5 and a minimumour consolidated secured leverage ratio, of consolidated earnings before interest and taxes to consolidated interest expense, as defined in the credit agreement,agreement. These ratios may not equal or exceed the following amounts during the periods indicated:
| | | | | | | | | | | | | | |
Fiscal Quarter Ending | | Consolidated total leverage ratio | | Consolidated secured leverage ratio |
September 30, 2021 through March 31, 2022 | | 5.00 to 1:00 | | 4.00 to 1:00 |
June 30, 2022 through March 31, 2023 | | 4.75 to 1:00 | | 3.75 to 1:00 |
June 30, 2023 through March 31, 2024 | | 4.50 to 1:00 | | 3.50 to 1:00 |
June 30, 2024 and each fiscal quarter thereafter | | 4.25 to 1:00 | | 3.50 to 1:00 |
In addition, we must maintain a minimum interest coverage ratio of 3.0. Additionally, theat least 2.75 to 1.00 through March 31, 2022 and 3.00 to 1.00 thereafter. The credit agreement contains customary representations and warranties including,and, as a condition to borrowing, requires that all such representations and warranties arebe true and correct in all material respects on the date of theeach borrowing, including representations as to no material adverse change in our business, assets, operations or financial condition.
There are currently no limitations on If our consolidated total leverage ratio exceeds 2.75 to 1.00, the aggregate annual amount of permitted dividends and share repurchases under the terms of our credit agreement. However, if our leverage ratio, defined as total debt less unrestricted cashis limited to EBITDA, should exceed 2.75 to 1, there would be an annual limitation on the amount of dividends and share repurchases.$60,000.
Daily average amounts outstanding under our current and previous credit facilityagreements were as follows:
| (in thousands) | (in thousands) | | Nine Months Ended September 30, 2020 | | Year Ended December 31, 2019 | (in thousands) | | Nine Months Ended September 30, 2021 | | Year Ended December 31, 2020 |
Daily average amount outstanding | Daily average amount outstanding | | $ | 1,042,350 | | | $ | 925,715 | | Daily average amount outstanding | | $ | 1,062,925 | | | $ | 1,016,896 | |
Weighted-average interest rate | Weighted-average interest rate | | 2.17 | % | | 3.54 | % | Weighted-average interest rate | | 2.35 | % | | 2.12 | % |
The following table showsAs of September 30, 2021, amounts were available for borrowing under our revolving credit facility as 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.follows:
| | | | | | | | |
(in thousands) | | Total
available |
Revolving credit facility commitment | | $ | 1,150,000500,000 | |
AmountAmounts drawn on revolving credit facility | | (1,040,000)(180,000) | |
Outstanding letters of credit(1) | | (7,428)(7,475) | |
Net available for borrowing as of September 30, 20202021 | | $ | 102,572312,525 | |
(1) We use standby letters of credit primarily to collateralize certain obligations related primarily to our self-insured workers’workers' compensation claims, as well as claims for environmental matters, as required by certain states. Thesestates.These letters of credit reduce the amount available for borrowing under our revolving credit facility.
Senior unsecured notes– In June 2021, we issued $500,000 of 8.0% senior, unsecured notes that mature in June 2029. The notes were issued via a private placement under Rule 144A of the Securities Act of 1933. Proceeds from the offering, net of discount and offering costs, were $490,741, resulting in an effective interest rate of 8.3%. The net proceeds from the notes were used to fund the acquisition of First American in June 2021 (Note 6). Interest payments are due each June and December. The indenture governing the notes contains covenants that limit our ability and the ability of our restricted subsidiaries to, among other things, incur additional indebtedness and liens, issue redeemable stock and preferred stock, pay dividends and distributions, make loans and investments and consolidate or merge or sell all or substantially all of our assets.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Leases were reflected on the consolidated balance sheets as follows:
| | | | | | | | | | | | | | |
(in thousands) | | September 30, 2021 | | December 31, 2020 |
Operating leases: | | | | |
Operating lease assets | | $ | 58,442 | | | $ | 35,906 | |
| | | | |
Accrued liabilities | | $ | 12,884 | | | $ | 11,589 | |
Operating lease liabilities | | 49,827 | | | 28,344 | |
Total operating lease liabilities | | $ | 62,711 | | | $ | 39,933 | |
Weighted-average remaining lease term (in years) | | 5.5 | | 4.7 |
Weighted-average discount rate | | 4.5 | % | | 3.1 | % |
| | | | |
Finance leases: | | | | |
Property, plant and equipment, gross | | $ | 35,575 | | | $ | 6,970 | |
Accumulated depreciation | | (7,136) | | | (6,324) | |
Property, plant and equipment, net | | $ | 28,439 | | | $ | 646 | |
| | | | |
Accrued liabilities | | $ | 347 | | | $ | 459 | |
Other non-current liabilities | | 27,202 | | | 140 | |
Total finance lease liabilities | | $ | 27,549 | | | $ | 599 | |
Weighted-average remaining lease term (in years) | | 15.8 | | 1.5 |
Weighted-average discount rate | | 6.0 | % | | 2.0 | % |
The components of lease expense were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Operating lease expense | | $ | 4,497 | | | $ | 5,006 | | | $ | 12,897 | | | $ | 15,044 | |
| | | | | | | | |
Finance lease expense: | | | | | | | | |
Amortization of right-of-use asset | | $ | 547 | | | $ | 187 | | | $ | 816 | | | $ | 561 | |
Interest on lease liabilities | | 432 | | | 5 | | | 437 | | | 17 | |
Total finance lease expense | | $ | 979 | | | $ | 192 | | | $ | 1,253 | | | $ | 578 | |
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Lease assets obtained in exchange for lease obligations: | | | | | | | | |
Operating leases(1) | | $ | — | | | $ | — | | | $ | 33,948 | | | $ | 10,105 | |
Finance leases(2) | | 26,889 | | | — | | | 26,889 | | | — | |
| | | | | | | | |
Cash paid for amounts included in lease obligations: | | | | | | | | |
Operating cash flows from operating leases | | $ | 3,653 | | | $ | 5,225 | | | $ | 12,649 | | | $ | 13,993 | |
Operating cash flows from finance leases | | 2 | | | 5 | | | 7 | | | 17 | |
Financing cash flows from finance leases | | 104 | | | 181 | | | 369 | | | 575 | |
(1) Includes operating lease assets and related liabilities of $24,396 recorded in conjunction with the acquisition of First American in June 2021 (Note 6).
(2) Consists of a lease on a facility located in Minnesota that commenced in July 2021.
Maturities of lease liabilities were as follows as of September 30, 2021:
| | | | | | | | | | | | | | |
(in thousands) | | Operating lease obligations | | Finance lease obligations |
Remainder of 2021 | | $ | 4,032 | | | $ | 79 | |
2022 | | 18,545 | | | 1,313 | |
2023 | | 13,827 | | | 2,709 | |
2024 | | 12,668 | | | 2,743 | |
2025 | | 10,691 | | | 2,777 | |
Thereafter | | 23,854 | | | 34,691 | |
Total lease payments | | 83,617 | | | 44,312 | |
Less lease incentives receivable | | (10,250) | | | — | |
Less imputed interest | | (10,656) | | | (16,763) | |
Present value of lease payments | | $ | 62,711 | | | $ | 27,549 | |
| | |
NOTE 12:14: OTHER COMMITMENTS AND CONTINGENCIES |
Leases– During the third quarter of 2020, we executed leases on 2 new facilities, located in Georgia and Minnesota, 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. These liabilities were not significant as of September 30, 20202021 or December 31, 2019.2020.
First American indemnification– Pursuant to the First American acquisition agreement, we are entitled to limited indemnification for certain expenses and losses, if any, that may be incurred after the consummation of the transaction that arise out of certain matters, including a Federal Trade Commission investigation initiated in December 2019 seeking information to determine whether certain subsidiaries of First American may have engaged in conduct prohibited by the Federal Trade
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Commission Act, the Fair Credit Reporting Act or the Duties of Furnishers of Information. As fully set forth in the merger agreement, our rights to indemnification for any such expenses and losses are limited to the amount of an indemnity holdback, which will be our sole recourse for any such losses. Neither a liability for any fines nor any asset for the related holdback have been recorded in our consolidated financial statements as of September 30, 2021, as the amount cannot be reasonably estimated.
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 $9,079$8,738 as of September 30, 20202021 and $7,576$9,046 as of December 31, 2019.2020. 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, 20202021 or December 31, 2019.2020.
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 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 13:NOTE 15: 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. NaNNo shares were repurchased during the third quarter of 2020. During the first nine months of 2020, we repurchased 499 thousand shares for $14,000. As of September 30, 2020,2021 and $287,452 remained available for repurchase under the authorization.authorization as of September 30, 2021. During the quarter ended June 30, 2021, we issued 294 thousand shares to employees of First American in conjunction with the acquisition (Note 6), resulting in cash proceeds of $13,000 during the quarter.
| | |
NOTE 14:16: BUSINESS SEGMENT INFORMATION |
For many years, we operated 3 reportable business segments: Small Business Services, Financial Services and Direct Checks. These 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, generally organized by product type, as follows:
•Payments – This segment includes our treasury management solutions, including remittance and lockbox processing, remote deposit capture, receivables management, payment processing and paperless treasury management, in addition tomanagement; merchant in-store, online and mobile payment solutions; payroll and disbursement services, including Deluxe Payment ExchangeExchange; and fraud and security services.
•Cloud Solutions – This segment includes web hosting and design services, data-driven marketing solutions and hosted solutions, including digital engagement, logo design, financial 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 strategic sourcing services.
•Checks – This segment includes printed personal and business checks.
| | |
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in the 20192020 Form 10-K. We allocate corporate costs for our shared services functions to our business segments when the costs are directly attributable to a segment. This includes certain sales and marketing, human resources, supply chain, real estate, finance, information technology and legal costs. Costs that are not directly attributable to a business segment are reported as Corporate operations and consist primarily of marketing, accounting, information technology, facilities, executive management and legal, tax and 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.
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
Under the new segment structure, ourOur chief operating decision maker (i.e., our Chief Executive Officer) reviews earnings before interest, taxes, depreciation and amortization (EBITDA) on an adjusted basis for each segment when deciding how to allocate resources and to assess segment operating performance. Adjusted EBITDA for each segment excludes depreciation and 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 costs; 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 when making investment or operating decisions regarding our reportable business segments.
The following is our segmentSegment information for the quarters and nine months ended September 30, 2021 and 2020 and 2019. was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Payments: | | | | | | | | |
Revenue | | $ | 160,268 | | | $ | 74,675 | | | $ | 343,045 | | | $ | 223,886 | |
Adjusted EBITDA | | 31,598 | | | 16,746 | | | 71,125 | | | 50,352 | |
Cloud Solutions: | | | | | | | | |
Revenue | | 69,497 | | | 63,758 | | | 199,784 | | | 193,600 | |
Adjusted EBITDA | | 19,036 | | | 16,425 | | | 55,047 | | | 45,494 | |
Promotional Solutions: | | | | | | | | |
Revenue | | 130,330 | | | 124,929 | | | 389,825 | | | 385,667 | |
Adjusted EBITDA | | 17,673 | | | 21,478 | | | 56,804 | | | 46,529 | |
Checks: | | | | | | | | |
Revenue | | 172,046 | | | 176,099 | | | 518,968 | | | 533,135 | |
Adjusted EBITDA | | 77,254 | | | 84,954 | | | 240,979 | | | 258,392 | |
Total segment: | | | | | | | | |
Revenue | | $ | 532,141 | | | $ | 439,461 | | | $ | 1,451,622 | | | $ | 1,336,288 | |
Adjusted EBITDA | | 145,561 | | | 139,603 | | | 423,955 | | | 400,767 | |
The following table presents a reconciliation of total segment information for 2019 has been revisedadjusted EBITDA to reflect our current segment structure.consolidated income (loss) before income taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Total segment adjusted EBITDA | | $ | 145,561 | | | $ | 139,603 | | | $ | 423,955 | | | $ | 400,767 | |
Corporate operations | | (42,832) | | | (37,090) | | | (133,259) | | | (131,101) | |
Depreciation and amortization expense | | (41,906) | | | (27,972) | | | (102,929) | | | (83,065) | |
Interest expense | | (21,494) | | | (5,083) | | | (35,548) | | | (18,254) | |
Pretax income attributable to non-controlling interest | | 37 | | | 21 | | | 99 | | | 46 | |
Asset impairment charges | | — | | | (2,760) | | | — | | | (101,749) | |
Restructuring, integration and other costs | | (13,894) | | | (18,941) | | | (41,085) | | | (59,064) | |
CEO transition costs | | — | | | — | | | — | | | (10) | |
Share-based compensation expense | | (7,434) | | | (6,240) | | | (21,801) | | | (15,335) | |
Acquisition transaction costs | | (208) | | | — | | | (18,816) | | | (9) | |
Certain legal-related (expense) benefit | | (638) | | | — | | | (941) | | | 2,165 | |
Loss on sales of customer lists | | — | | | — | | | — | | | (18) | |
Income (loss) before income taxes | | $ | 17,192 | | | $ | 41,538 | | | $ | 69,675 | | | $ | (5,627) | |
| | |
DELUXE CORPORATION CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) |
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.offerings:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2021 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
Checks | | $ | — | | | $ | — | | | $ | — | | | $ | 172,046 | | | $ | 172,046 | |
Merchant services and other payments solutions | | 103,014 | | | — | | | — | | | — | | | 103,014 | |
Forms and other products | | — | | | — | | | 68,646 | | | — | | | 68,646 | |
Marketing and promotional solutions | | — | | | — | | | 61,684 | | | — | | | 61,684 | |
Treasury management solutions | | 57,254 | | | — | | | — | | | — | | | 57,254 | |
Data-driven marketing solutions | | — | | | 41,956 | | | — | | | — | | | 41,956 | |
Web and hosted solutions | | — | | | 27,541 | | | — | | | — | | | 27,541 | |
Total revenue | | $ | 160,268 | | | $ | 69,497 | | | $ | 130,330 | | | $ | 172,046 | | | $ | 532,141 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2020 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
Checks | | $ | — | | | $ | — | | | $ | — | | | $ | 176,099 | | | $ | 176,099 | |
Merchant services and other payments solutions | | 19,257 | | | — | | | — | | | — | | | 19,257 | |
Forms and other products | | — | | | — | | | 77,492 | | | — | | | 77,492 | |
Marketing and promotional solutions | | — | | | — | | | 47,437 | | | — | | | 47,437 | |
Treasury management solutions | | 55,418 | | | — | | | — | | | — | | | 55,418 | |
Data-driven marketing solutions | | — | | | 30,508 | | | — | | | — | | | 30,508 | |
Web and hosted solutions | | — | | | 33,250 | | | — | | | — | | | 33,250 | |
Total revenue | | $ | 74,675 | | | $ | 63,758 | | | $ | 124,929 | | | $ | 176,099 | | | $ | 439,461 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
Checks | | $ | — | | | $ | — | | | $ | — | | | $ | 518,968 | | | $ | 518,968 | |
Merchant services and other payments solutions | | 170,431 | | | — | | | — | | | — | | | 170,431 | |
Forms and other products | | — | | | — | | | 218,622 | | | — | | | 218,622 | |
Marketing and promotional solutions | | — | | | — | | | 171,203 | | | — | | | 171,203 | |
Treasury management solutions | | 172,614 | | | — | | | — | | | — | | | 172,614 | |
Data-driven marketing solutions | | — | | | 115,120 | | | — | | | — | | | 115,120 | |
Web and hosted solutions | | — | | | 84,664 | | | — | | | — | | | 84,664 | |
Total revenue | | $ | 343,045 | | | $ | 199,784 | | | $ | 389,825 | | | $ | 518,968 | | | $ | 1,451,622 | |
| | |
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 | | Nine Months Ended September 30, 2020 |
(in thousands) | (in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated | (in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
Checks | Checks | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 533,135 | | | $ | 533,135 | | Checks | | $ | — | | | $ | — | | | $ | — | | | $ | 533,135 | | | $ | 533,135 | |
Merchant services and other payments solutions | | Merchant services and other payments solutions | | 56,808 | | | — | | | — | | | — | | | 56,808 | |
Forms and other products | Forms and other products | | 0 | | | 0 | | | 234,735 | | | 0 | | | 234,735 | | Forms and other products | | — | | | — | | | 234,735 | | | — | | | 234,735 | |
Marketing and promotional solutions | | Marketing and promotional solutions | | — | | | — | | | 150,932 | | | — | | | 150,932 | |
Treasury management solutions | Treasury management solutions | | 167,078 | | | 0 | | | 0 | | | 0 | | | 167,078 | | Treasury management solutions | | 167,078 | | | — | | | — | | | — | | | 167,078 | |
Marketing and promotional solutions | | 0 | | | 0 | | | 150,932 | | | 0 | | | 150,932 | | |
Data-driven marketing solutions | | Data-driven marketing solutions | | — | | | 88,927 | | | — | | | — | | | 88,927 | |
Web and hosted solutions | Web and hosted solutions | | 0 | | | 104,673 | | | 0 | | | 0 | | | 104,673 | | Web and hosted solutions | | — | | | 104,673 | | | — | | | — | | | 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 | Total revenue | | $ | 223,886 | | | $ | 193,600 | | | $ | 385,667 | | | $ | 533,135 | | | $ | 1,336,288 | | 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 | |
The following tables present revenue disaggregated by geography, based on where items are shipped from or where services are performed:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2021 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
United States | | $ | 150,594 | | | $ | 60,778 | | | $ | 124,571 | | | $ | 166,339 | | | $ | 502,282 | |
Foreign, primarily Canada and Australia | | 9,674 | | | 8,719 | | | 5,759 | | | 5,707 | | | 29,859 | |
Total revenue | | $ | 160,268 | | | $ | 69,497 | | | $ | 130,330 | | | $ | 172,046 | | | $ | 532,141 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
(in thousands) | | Payments | | Cloud Solutions | | Promotional Solutions | | Checks | | Consolidated |
United States | | $ | 312,874 | | | $ | 173,555 | | | $ | 373,042 | | | $ | 501,152 | | | $ | 1,360,623 | |
Foreign, primarily Canada and Australia | | 30,171 | | | 26,229 | | | 16,783 | | | 17,816 | | | 90,999 | |
Total revenue | | $ | 343,045 | | | $ | 199,784 | | | $ | 389,825 | | | $ | 518,968 | | | $ | 1,451,622 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | |
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 15:17: RISKS AND UNCERTAINTIES |
The impact on our business of the continuing 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 7,8, 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.customers. The extent to which the pandemic will continue to impact our business depends on future developments, including the severity and duration of the pandemic, the impact of variants of the virus, the distribution and effectiveness of vaccines, 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 effectsimpact 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 SafeguardPromotional Solutions distributors of $41,583$21,729 as of September 30, 2020.2021. These distributors sell theirour products and services primarily to small businesses, which have been significantly impacted by the COVID-19 pandemic. As of September 30, 2020,2021, 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.$2,837. 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 |
Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:
•Executive Overview that discusses what we do, our operating results at a high level and our financial outlook for the upcoming year;
•Consolidated Results of Operations; Restructuring, Integration and Other Costs; and Segment Results that includes 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, 20192020 (the 20192020 Form 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 20192020 Form 10-K are included in Part II, Item 1AIA of this report on Form 10-Q. The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. 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 U.S. (GAAP). In addition, we discuss free cash flow, net debt, liquidity, adjusted diluted earnings per share (EPS) and consolidated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA)(adjusted EBITDA), all of which are non-GAAP financial measures. We believe that these non-GAAP financial 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 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 non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and therefore, may not result in useful comparisons. The reconciliation of our non-GAAP
financial measures to the most directly comparable GAAP financial measures can be found in Consolidated Results of Operations.
Revision– During the second quarter of 2021, we identified errors in the calculations of the goodwill impairment charges recorded during the third quarter of 2019 and the first quarter of 2020, resulting in an understatement of the goodwill impairment charges and net losses and an overstatement of goodwill. The errors in our calculations resulted from the erroneous application of the simultaneous equation method, which effectively grosses up the goodwill impairment charge to account for the related income tax benefit, so that the resulting carrying value does not exceed the calculated fair value. We have corrected the errors by revising the consolidated financial statements presented herein. Prior periods not presented herein will be revised, as applicable, in future filings. Further information regarding the errors can be found under the caption "Note 1: Consolidated Financial Statements" of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
RealignmentAcquisition – For many years,On June 1, 2021, we operated 3 reportable business segments: Small Business Services, Financial Servicesacquired all of the equity of First American Payment Systems, L.P. (First American) in a cash transaction for $956.7 million, net of cash, cash equivalents, restricted cash and Direct Checks. These segments were generally organized by customer typerestricted cash equivalents acquired, subject to customary adjustments under the terms of the acquisition agreement. First American is a large-scale payments technology company that provides partners and reflectedmerchants with comprehensive in-store, online and mobile payment solutions. The results of First American are included in our Payments segment and included revenue of $82.5 million and a contribution of $16.3 million to Payments adjusted EBITDA for the way we managedthird quarter of 2021 and revenue of $109.8 million and a contribution to Payments adjusted EBITDA of $21.5 million for the company. Effective January 1, 2020, we reorganized our reportable business segments to alignfirst nine months of 2021. The acquisition was funded with structuralcash on hand 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 and reflect the way we currently manage the company.proceeds from new debt. Further information regarding our segments and our product and service offeringsthe acquisition can be found under the caption "Note 14: Business Segment Information"6: Acquisition" and further information regarding our debt can be found under the caption "Note 12: Debt," both of which appear in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
COVID-19 impact on 2020 results – The COVID-19 pandemic began to impact our operations late in the first quarter of 2020. Total revenue forInformation regarding the second quarter ofimpact in 2020, declined 16.9%, as comparedwell as actions we took in response to the second quarterpandemic, can be found under the caption "Executive Overview" in Part II, Item 7 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 ofForm 10-K.
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 revenuethe pandemic continued in the first quarter of 2021 and was most severe in April. It began to improve throughout the remaindermain driver of the second quarter and through third quarter,9.3% decrease in revenue, as well. Adjusted EBITDA margin was 23.3% forcompared to the thirdfirst 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 both2020. During the second and third quarters. Wequarters of 2021, we saw some recovery in revenue volumes as the impacts of the pandemic lessened. Our customers resumed some of their marketing and promotional activities as government restrictions were lifted and vaccines became more widely available. Also contributing to the increase in data-driven marketing revenue was the continuation of low interest rates and an improving credit risk environment, which drove increased marketing efforts by our banking and mortgage lending customers. Business check volumes also took stepscontinued to reduce discretionary spendingrecover and other expenditureswithin Payments, we continued with new customer implementations, some of which had been delayed, in line withpart, due to impacts of the pandemic. Future impacts of the pandemic on our results of operations remain uncertain, as increases in infection rates and/or new variants of the virus could impact our customers' activities and our revenue declines. These steps included temporary salary reductions for all salaried employees, including our leadership team and boardvolumes.
Despite the continuing challenges 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 flowpandemic, net income improved 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 2020,2021, as compared to the first nine months of 2019. Factors2020, and adjusted EBITDA margin remained strong at 20.0% for the first nine months of 2021. Cash provided by operating activities decreased $17.6 million for the first nine months of 2021, as compared to the first nine months of 2020, driven by investments in our business, including transaction costs related to the acquisition of First American and investments in software-as-a-service (SaaS) solutions we are utilizing, including a new enterprise resource planning system. Additionally, the prior year benefited from the deferral of federal payroll tax payments under the CARES Act and temporary salary and other cost reductions implemented in response to the COVID-19 pandemic. Free cash flow decreased $56.0 million for the first nine months of 2021, as compared to the first nine months of 2020, including a $38.4 million increase in purchases of capital assets, as we continue investments to support our long-term growth. Total debt as of September 30, 2021 was $1.78 billion, reflecting the additional debt we incurred in the second quarter of 2021 to complete the First American acquisition. Net debt as of September 30, 2021 was $1.66 billion. We held cash and cash equivalents of $121.1 million as of September 30, 2021, and liquidity was $433.6 million. Our capital allocation priorities are to responsibly invest in growth, pay our dividend, reduce debt and return value to our shareholders. We will evaluate future share repurchases on an opportunistic basis.
2021 results vs. 2020 – Numerous factors drove the increase in net income for the first nine months of 2021, as compared to the first nine months of 2020. The primary factor was a decrease in asset impairment charges of $101.7 million, as compared to 2020. Other factors that decreasedincreased net lossincome included:
•a decreaserevenue growth resulting from some recovery from the impacts of the COVID-19 pandemic, as well as new business in pre-tax asset impairment chargesall of $293.0 million, as compared to 2019;our segments resulting from the success of our One Deluxe strategy;
•actions taken to reduce costs in line with reduced revenues and the continuing evaluation ofas we continually evaluate 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;structure;
•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;
•aan $18.0 million 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;restructuring, integration and other costs; and
•the absence of non-recurring CEO transition costsan $11.4 million decrease in bad debt expense, primarily driven by allowances recorded in 2020 related to notes receivable from our Promotional Solutions distributors, as compared to $8.5 million in 2019.well as trade accounts receivable.
Partially offsetting these decreasesincreases in net lossincome 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 business forms the loss of web hosting revenue in the third quarter of 2019 and the 2020 decision to exit certain product lines within Cloud Solutions;
•incrementalacquisition transaction costs of approximately $7.0$18.8 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, costsin 2021 related to enabling employees to work from home and additional facility cleaning costs;the First American acquisition;
•a $5.6$17.3 million increase in badinterest expense resulting from debt expenseissued to complete the First American acquisition;
•increased investments in our growth, primarily costs related to sales and financial management tools;
•the benefit in the prior year of approximately $10.0 million from temporary actions taken in response to the COVID-19 pandemic, including savings from a temporary salary reduction, furloughs and other actions, net of incremental costs we incurred in 2020 related to notes receivable from our Safeguard distributors;response to the pandemic;
•inflationary pressures on hourly wages, materials and delivery;
•the impact of the COVID-19 pandemic on our revenue volume in the first quarter of 2021, as compared to the first quarter of 2020; and
•a $5.4$6.5 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.share-based compensation expense.
Diluted loss per shareEPS of $0.40$1.13 for the first nine months of 2020,2021, as compared to diluted loss per share of $5.65$0.48 for the first nine months of 2019,2020, reflects the lowerincrease in net lossincome as described in the preceding paragraphs, as well as lowerpartially offset by higher average shares outstanding in 2020.2021. Adjusted diluted EPS for the first nine months of 20202021 was $3.70,$3.62, compared to $4.88$3.70 for the first nine months of 2019,2020, and excludes the impact of non-cash items or items that we believe are not indicative of ongoing operations.our current period operating performance. The decrease in adjusted diluted EPS was driven primarily by the continuing secular decline in checks and business forms, various investments in our growth, the benefit in the prior year of temporary actions taken in response to the COVID-19 pandemic, inflationary pressures on hourly wages, materials and delivery, and the negative impact of the COVID-19 pandemic on our first quarter year-over-year revenue volumes. These decreases in adjusted EPS were partially offset by the impact of new client wins in all of our segments, continuing recovery of reduced revenue volumes from the impact of the COVID-19 pandemic, various cost savings actions across functional areas and lower bad debt expense. A reconciliation of diluted earnings (loss) 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 2020 included pre-taxpretax asset impairment charges of $98.0$101.7 million, or $1.45$1.53 per share. The impairment charges related primarily to the goodwill of our Promotional Solutions and Cloud Solutions Web Hosting reporting units, as well as certainamortizable intangibles inof our Cloud Solutions Web Hosting reporting unit. Net loss forunit, resulting from the first nine monthsestimated impact of 2019 included pre-tax asset impairment chargesthe COVID-19 pandemic on the operating results 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 certain intangibles, primarily in our former Small Business Services Web Services reporting unit.these businesses. Further information regarding these impairment charges can be found under the caption "Note 7:8: 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""Critical Accounting Policies" in Part II, Item 7 of the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
"One Deluxe" Strategy
A detailed discussion of our strategy can be found in Part I, Item 1 of the 20192020 Form 10-K. In support of our strategy, we are investing significant resources to build out our technology platforms. We completed the implementation of a human capital management system in January 2020. We also are investing in sales technology that enables a single view of our customers, thereby providing for deeper cross-sell opportunities. In addition, we are investing in our financial tools, including an enterprise resource planning system and a financial planning and 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 future acquisitions. While we reduced 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 invest 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 segments: Payments, Cloud Solutions, Promotional Solutions and Checks. We expect to reinvest free cash flow into the 2 segments we view as our primary platforms for growth: Payments and Cloud Solutions. Realignments such as this take time, considerable senior management effort, material "buy-in" from employees and significant investment. We continue to make progress on our transformation and manybe encouraged by the success of our investmentsOne Deluxe strategy. We have made significant progress in the integration of our various technology platforms, developed an enterprise-class sales organization, assembled a talented management team, and built an organization focused on developing new and improved products. As a result, we are beginning to deliverseeing the positive results. During the first 2 monthsimpact of 2020, prior to the COVID-19 pandemic,new client wins in all of our segments and we determined that we were positioned to augment our business through meaningful acquisitions. As such, we completed the acquisition of First American on track to deliver 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, weJune 1, 2021. We believe that First American's end-to-end payments technology platform is providing significant leverage that will 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 One Deluxe structure is able to quickly respond to our customers' needs and drive profitableaccelerate organic revenue growth.
Outlook for 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. Outlook for 2021
We expect our revenue to increase 10% to 12% for the revenue recovery to be slightly lower in the fourth quarter of 2020,full year, as compared to the third quarter, and we2020. 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 2020full year will remain atbe between 20.0% and 21.0%, and we anticipate that our long-term target of 20% or better.adjusted annual effective tax rate for 2021 will be approximately 25.0%. These estimates assume a continued economic recovery and are subject to, among other things, the macroeconomic unknowns associated with the COVID-19 pandemic, including supply chain constraints, labor supply issues and inflation.
In response to the pandemic,As of September 30, 2021, 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$121.1 million as of September 30, 2020. In July 2020, we repaid $100.0and $312.5 million of the amount drawn onwas available for borrowing under our revolving credit facility,facility. We anticipate that capital expenditures will be between $95.0 million and in October 2020,$105.0 million for the full year, as we repaid an additional $140.0 million. These amounts remain available to us for borrowing,continue 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.important transformation work, innovation investments and building scale across our product categories. We anticipatealso expect that we will continue to pay our regular quarterly dividend. However, dividends are approved by our board of directors each quarter and thus, are subject to change. We anticipate that net cash generated by operations, along with the cash and cash equivalents on hand and availability under our credit facility, will be sufficient to support our operations and to meet our financial commitmentsdebt service requirements for the next 12 months. We were in compliance with our debt covenants as of September 30, 2020,2021, and we anticipate that we will remain in compliance with our debt covenants throughout the next 12 months.
| | |
CONSOLIDATED RESULTS OF OPERATIONS |
Consolidated Revenue
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Total revenue | Total revenue | | $ | 439,461 | | | $ | 493,593 | | | (11.0%) | | $ | 1,336,288 | | | $ | 1,486,645 | | | (10.1%) | Total revenue | | $ | 532,141 | | | $ | 439,461 | | | 21.1% | | $ | 1,451,622 | | | $ | 1,336,288 | | | 8.6% |
The decreasesincreases in total revenue for the third quarter and first nine months of 2020,2021, as compared to 2019,the same periods in 2020, were driven, primarilyin part, by the First American acquisition, which contributed revenue of $82.5 million to the Payments segment in the third quarter of 2021 and $109.8 million for the first nine months of 2021. In addition, revenue benefited from new clients in all of our segments, resulting from the success of our One Deluxe strategy. We also experienced some recovery of volume declines resulting from the impact of the COVID-19 pandemic, primarilyas discussed in our Promotional Solutions, Checks and Executive Overview. Also contributing to the revenue increase was increased data-driven marketing revenue within Cloud Solutions, segments. In addition,resulting in part, from the continuation of low interest rates and an improving credit risk environment, which drove increased marketing efforts by our banking and mortgage lending customers. Partially offsetting these increases in revenue continued to be impacted bywas the continuing secular decline in order volume for checks and forms. Cloud Solutions web hosting revenue also declined, due to our decision inbusiness forms, and sales of personal protective equipment (PPE) decreased approximately $3.0 million for 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 business2021 and the decision to exit certain product lines. These decreases in revenue were partially offset by new revenue from sales of PPE in our Promotional Solutions segment of $29.5$22.0 million for the first nine months of 2021, as compared to the prior year periods. Within Cloud Solutions' web and hosted solutions revenue, our 2020 primarilydecision to exit certain product lines resulted in the second quartera revenue decline of the year. Also, treasury management revenue within our Payments segment increased 20.9%$4.8 million for the third quarter of 20202021 and 22.1%$17.2 million for the first nine months of 2020, 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, prior2021, as compared to the commencement of the impact of the COVID-19 pandemic.
Service revenue represented 32.0%37.5% of total revenue for the first nine months of 20202021 and 29.8%32.0% for the first nine months of 2019.2020. We do not manage our business based on product versus service revenue. Instead, we analyze our revenue based on the product and service offerings shown under the caption: "Note 14:16: 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:
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Payments | Payments | | 17.0 | % | | 13.1 | % | | 16.7 | % | | 13.0 | % | Payments | | 30.1 | % | | 17.0 | % | | 23.6 | % | | 16.7 | % |
Cloud Solutions | Cloud Solutions | | 14.5 | % | | 16.2 | % | | 14.5 | % | | 16.0 | % | Cloud Solutions | | 13.1 | % | | 14.5 | % | | 13.8 | % | | 14.5 | % |
Promotional Solutions | Promotional Solutions | | 28.4 | % | | 31.8 | % | | 28.9 | % | | 31.5 | % | Promotional Solutions | | 24.5 | % | | 28.4 | % | | 26.9 | % | | 28.9 | % |
Checks | Checks | | 40.1 | % | | 38.9 | % | | 39.9 | % | | 39.5 | % | Checks | | 32.3 | % | | 40.1 | % | | 35.7 | % | | 39.9 | % |
Total revenue | Total revenue | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total revenue | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Consolidated Cost of Revenue
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Total cost of revenue | Total cost of revenue | | $ | 174,461 | | | $ | 203,723 | | | (14.4%) | | $ | 538,792 | | | $ | 605,875 | | | (11.1%) | Total cost of revenue | | $ | 244,151 | | | $ | 174,461 | | | 39.9% | | $ | 629,237 | | | $ | 538,792 | | | 16.8% |
Total cost of revenue as a percentage of total revenue | Total cost of revenue as a percentage of total revenue | | 39.7 | % | | 41.3 | % | | (1.6) pts. | | 40.3 | % | | 40.8 | % | | (0.5) pts. | Total cost of revenue as a percentage of total revenue | | 45.9 | % | | 39.7 | % | | 6.2 pts. | | 43.3 | % | | 40.3 | % | | 3.0 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 decreasesincreases in total cost of revenue for the third quarter and first nine months of 2020,2021, as compared to 2019,the same periods in 2020, were primarily attributable to the decrease in revenue volumeadditional costs resulting from the First American acquisition, including acquisition amortization, as well as the increase in revenue resulting from new client wins in all of our segments and some recovery of volume declines driven by the impact of the COVID-19 impact.pandemic. In addition, we experienced some inflationary pressures on hourly wages, materials and delivery. Partially offsetting these increases in total cost of revenue decreased as a result ofwere reduced revenue volumes from the continuedcontinuing secular decline in checks and business forms, as well as changesthe decline in client mixPPE revenue volume in the Cloud Solutions segment. Benefits from cost reductions2021 and efficienciesa net benefit in our fulfillment area, unrelated2021 driven by incremental costs incurred in 2020 related to our response to the COVID-19 pandemic, reduced cost of revenue approximately $2.0 million for the third quarter of 2020 and $6.0 million for the first nine months of 2020, while actions taken to reduce costs in response to COVID-19 reduced cost of revenue approximately $2.0 million for the third quarter of 2020 and $5.0 million for the first nine months of 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.pandemic. Total cost of revenue as a percentage of total revenue decreased in both periods, due in large part,increased for the third quarter and first nine months of 2021, as compared to the changesame periods in revenue mix driven by2020, due primarily to the loss of lower margin revenue resulting from the COVID-19 impact. The positive impact of the changeFirst American acquisition, inflationary pressures, the mix of data-driven marketing clients and the mix of Promotional Solutions revenue. In addition, restructuring and integration costs increased $1.6 million for the third quarter of 2021 and $2.2 million for the first nine months of 2021, as compared to the same periods in mix was partially2020. We anticipate that much of the inflationary pressures we have been experiencing will be offset by costs related to the new treasury management clients.price increases in future periods.
Consolidated Selling, General & Administrative (SG&A) Expense
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
SG&A expense | SG&A expense | | $ | 198,871 | | | $ | 213,318 | | | (6.8%) | | $ | 634,645 | | | $ | 665,787 | | | (4.7%) | SG&A expense | | $ | 239,251 | | | $ | 198,871 | | | 20.3% | | $ | 685,593 | | | $ | 634,645 | | | 8.0% |
SG&A expense as a percentage of total revenue | SG&A expense as a percentage of total revenue | | 45.3 | % | | 43.2 | % | | 2.1 pts. | | 47.5 | % | | 44.8 | % | | 2.7 pts. | SG&A expense as a percentage of total revenue | | 45.0 | % | | 45.3 | % | | (0.3) pts. | | 47.2 | % | | 47.5 | % | | (0.3) pts. |
The decreasesincreases in SG&A expense for the third quarter and first nine months of 2020,2021, as compared to 2019,the same periods in 2020, were driven primarily by lower commissions in both periods on the lower order volume resulting from COVID-19, as well as the benefitoperating costs of organizational actions taken in response to COVID-19, including the temporary salary reductions and the suspensionFirst American of the 401(k) plan employer matching contribution. These actions lowered SG&A expense approximately $8.0$19.3 million for the third quarter of 20202021 and $20.0$25.7 million for the first nine months of 2020. Also lowering2021. In addition, we incurred transaction costs of $18.8 million related to the acquisition during the first nine months of 2021 and expense for SaaS solutions that we are utilizing, primarily related to sales and financial management tools, also increased as we continue to invest in our growth strategy. Acquisition amortization increased $9.0 million for the third quarter of 2021 and $12.5 million for the first nine months of 2021, driven primarily by the First American acquisition, and the prior year periods benefited approximately $7.0 million for the third quarter and $12.0 for the first nine months of the year from temporary actions taken in response to the COVID-19 pandemic in 2020, net of incremental costs we incurred in 2020 related to our response to the pandemic. Commission expense also increased due to the continuing recovery of revenue volume impacted by the COVID-19 pandemic, and share-based compensation expense increased $1.3 million for the third quarter of 2021 and $6.1 million for the first nine months of 2021.
Partially offsetting these increases in SG&A expense were various cost reduction actions, that were unrelated toincluding efficiencies in sales, marketing and 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 millioncorporate support functions. In addition, 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 recorded2021, bad debt expense of $5.6decreased $11.4 million, primarily due to allowances recorded in our Promotional Solutions segment2020 related to notes receivable from our SafeguardPromotional Solutions distributors, primarily one distributor that was underperforming prioras well as trade accounts receivable. Commission expense related to sales of PPE also decreased along with the commencement of the COVID-19 pandemic.
In addition to the above factors, SG&A expense was also impacted by changeslower sales volume in the following items:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 our transformation more than offset the benefit of cost reductions during these periods.2021.
Restructuring and Integration Expense
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Restructuring and integration expense | Restructuring and integration expense | | $ | 18,949 | | | $ | 26,255 | | | $ | (7,306) | | | $ | 56,957 | | | $ | 49,089 | | | $ | 7,868 | | Restructuring and integration expense | | $ | 12,335 | | | $ | 18,949 | | | $ | (6,614) | | | $ | 38,012 | | | $ | 56,957 | | | $ | (18,945) | |
We are currently pursuing
Over the past 2 years, we pursued several initiatives designed to focus our business behind our growth strategy and to increase our efficiency. As we completed certain of these initiatives, our restructuring and integration expense decreased for the third quarter and first nine months of 2021, as compared to the same periods in 2020. Further information regarding these costs can be found under Restructuring, Integration and Other Costs.
Asset Impairment Charges
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Asset impairment charges | Asset impairment charges | | $ | 2,760 | | | $ | 390,980 | | | $ | (388,220) | | | $ | 97,973 | | | $ | 390,980 | | | $ | (293,007) | | Asset impairment charges | | $ | — | | | $ | 2,760 | | | $ | (2,760) | | | $ | — | | | $ | 101,749 | | | $ | (101,749) | |
We did not record any asset impairment charges during the third quarter or first nine months of 2021. During the third quarter of 2020, we recorded pre-tax asset impairment charges of $2.8 million, primarily related to an underperformingthe assets of a small business distributor that we previously purchased.
During the first nine months of 2020, we recorded pre-tax asset impairment charges of $98.0$101.7 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.unit, resulting from the estimated impact of the COVID-19 pandemic on the operating results of these businesses. Further information regarding these charges can be found under the caption "Note 7:8: Fair Value Measurements" of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
During the third quarterreport and first nine months of 2019, we recorded pre-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 under the caption "Note 8: Fair Value Measurements""Critical Accounting Policies" in Part II, Item 7 of the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
Interest Expense
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Interest expense | Interest expense | | $ | 5,083 | | | $ | 8,710 | | | (41.6%) | | $ | 18,254 | | | $ | 27,251 | | | (33.0%) | Interest expense | | $ | 21,494 | | | $ | 5,083 | | | 322.9% | | $ | 35,548 | | | $ | 18,254 | | | 94.7% |
Weighted-average debt outstanding | Weighted-average debt outstanding | | 1,058,478 | | | 931,092 | | | 13.7% | | 1,042,350 | | | 933,934 | | | 11.6% | Weighted-average debt outstanding | | 1,833,408 | | | 1,058,478 | | | 73.2% | | 1,286,368 | | | 1,042,350 | | | 23.4% |
Weighted-average interest rate | Weighted-average interest rate | | 1.9 | % | | 3.5 | % | | (1.6) pts. | | 2.2 | % | | 3.7 | % | | (1.5) pts. | Weighted-average interest rate | | 4.1 | % | | 1.9 | % | | 2.2 pts. | | 3.3 | % | | 2.2 | % | | 1.1 pts. |
The decreasesincreases in interest expense for the third quarter and first nine months of 2020,2021, as compared to 2019,the same periods in 2020, were driven primarily driven by the increase in our lower weighted-average interest rate in 2020.2021, due in part, to the $500.0 million notes issued in June 2021 with an interest rate of 8.0%. The increase in the amount of debt outstanding driven by the issuance of debt to fund the First American acquisition also negatively impacted interest expense. Further information regarding our debt can be found under the caption "Note 12: Debt" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
Income Tax Provision (Benefit)
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Income tax provision (benefit) | | $ | 12,094 | | | $ | (28,717) | | | (142.1%) | | $ | 13,958 | | | $ | (1,498) | | | (1,031.8%) | |
Income tax provision | | Income tax provision | | $ | 4,691 | | | $ | 12,094 | | | (61.2%) | | $ | 20,720 | | | $ | 13,746 | | | 50.7% |
Effective income tax rate | Effective income tax rate | | 29.1 | % | | 8.3 | % | | 20.8 pts. | | (754.1 | %) | | 0.6 | % | | (754.7) pts. | Effective income tax rate | | 27.3 | % | | 29.1 | % | | (1.8) pts. | | 29.7 | % | | (244.3 | %) | | 274.0 pts. |
The increasedecrease in our effective tax rate for the third quarter of 2020, 2021, as compared to 2019,the third quarter of 2020, was driven primarily by favorable discrete tax items in 2021, which reduced our third quarter 2021 tax rate by 1.4 points, compared to the impact of discrete tax expense in the third quarter of 2020. The discrete tax items consisted primarily of the tax impact of share-based compensation.
The increase in our effective tax rate for the first nine months of 2021, as compared to the first nine months of 2020, was largely due to the impact of the nondeductible portion of the goodwill impairment charges in the thirdfirst quarter of 2019,2020, which resulted in tax expense of $54.2 million and lowered our 20192020 effective income tax rate by 15.6228.1 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 104.535.7 point decrease,increase in our effective income tax rate, as compared to 2020. Our unitary state tax rate also increased, largely due to the impact of the First American acquisition, and the nondeductible acquisition costs related to the First American acquisition increased our effective tax rate by 2.8 points for the first nine months of 2019.2021. Further information regarding our effective income tax rate for the first nine months of 2020,2021, as compared to our 20192020 annual effective income tax rate, can be found under the caption: "Note 9:10: Income 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, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | |
(in thousands, except per share amounts) | | (in thousands, except per share amounts) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Net income (loss) | Net income (loss) | | $ | 29,444 | | | $ | (318,493) | | | (109.2%) | | $ | (15,809) | | | $ | (244,721) | | | (93.5%) | Net income (loss) | | $ | 12,501 | | | $ | 29,444 | | | (57.5%) | | $ | 48,955 | | | $ | (19,373) | | | 352.7% |
Diluted earnings (loss) per share | Diluted earnings (loss) per share | | 0.70 | | | (7.49) | | | (109.3%) | | (0.40) | | | (5.65) | | | (92.9%) | Diluted earnings (loss) per share | | 0.28 | | | 0.70 | | | (60.0%) | | 1.13 | | | (0.48) | | | 335.4% |
Adjusted diluted EPS(1) | Adjusted diluted EPS(1) | | 1.47 | | | 1.71 | | | (14.0%) | | 3.70 | | | 4.88 | | | (24.2%) | Adjusted diluted EPS(1) | | 1.10 | | | 1.47 | | | (25.2%) | | 3.62 | | | 3.70 | | | (2.2%) |
(1) See the following Reconciliation of Non-GAAP Financial Measures section, which illustrates how we calculate adjusted diluted EPS.
The increasedecreases in net income and diluted EPS for the third quarter of 2020,2021, as compared to 2019, was driven primarily by the asset impairment charges of $391.0 million in the third quarter of 2019, various cost reduction2020, were due primarily to a $16.4 million increase in interest expense, resulting from debt issued to complete the First American acquisition. In addition, expense for our SaaS solutions increased, primarily related to sales and financial management tools we are utilizing to advance our growth strategy, and the prior year benefited approximately $6.0 million from temporary actions taken in 2020 in response to the COVID-19 as well as cost reduction actionspandemic, net of incremental costs we incurred in 2020 unrelatedrelated 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,pandemic. Net income was also negatively impacted 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.business forms, the 2020 decision to exit certain product lines within Cloud Solutions and inflationary pressures on hourly wages, materials and delivery. Diluted EPS also decreased due to the higher amount of shares outstanding in 2021. These decreases in net income and diluted EPS were partially offset by new client wins in all of our segments and the continuing revenue volume recovery from the impacts of the COVID-19 pandemic. In addition, restructuring, integration and other costs decreased $5.0 million for the third quarter of 2021 and net income benefited from actions taken to reduce costs, as we continue to evaluate our cost structure.
The changedecrease in adjusted diluted EPS for the thirdquarter of 2021, as compared to the third quarter of 2020, was driven by the same factors discussed above that impacted diluted EPS, with the exception of the decrease in restructuring, integration and other costs. In addition, adjusted diluted EPS benefited from the contribution of the First American acquisition, as adjusted diluted EPS excludes the associated acquisition amortization of $11.9 million for the third quarter of 2021.
The increases in net lossincome, diluted EPS and adjusted diluted loss per shareEPS for the first nine months of 2020,2021, as compared to 2019, wasthe first nine months of 2020, were driven by the factors outlined in Executive Overview – 2020- 2021 results vs. 20192020. In addition, diluted loss per share benefited from lower average shares outstanding in the first nine months of 2020.
Adjusted EBITDA
| | | Quarter Ended September 30, | | Nine Months Ended September 30, | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Adjusted EBITDA(1) | Adjusted EBITDA(1) | | $ | 102,513 | | | $ | 119,336 | | | (14.1%) | | $ | 269,666 | | | $ | 350,530 | | | (23.1%) | Adjusted EBITDA(1) | | $ | 102,729 | | | $ | 102,513 | | | 0.2% | | $ | 290,696 | | | $ | 269,666 | | | 7.8% |
Adjusted EBITDA margin | Adjusted EBITDA margin | | 23.3 | % | | 24.2 | % | | (0.9) pts. | | 20.2 | % | | 23.6 | % | | (3.4) pts. | Adjusted EBITDA margin | | 19.3 | % | | 23.3 | % | | (4.0) pts. | | 20.0 | % | | 20.2 | % | | (0.2) pts. |
(1) See the following Reconciliation of Non-GAAP Financial Measures section, which illustrates how we calculate adjusted EBITDA.
Adjusted EBITDA was virtually unchanged for the third quarter of 2021, as compared to the third quarter of 2020. Adjusted EBITDA for the third quarter benefited from the contribution from the First American acquisition of $16.3 million, new client wins in all of our segments, the continuing revenue volume recovery from the impacts of the COVID-19 pandemic and actions taken to reduce costs, as we continue to evaluate our cost structure. Offsetting these benefits to adjusted EBITDA was increased expense for our SaaS solutions, primarily related to sales and financial management tools we are utilizing to advance our growth strategy, the net benefit in the prior year from temporary actions taken in response to the COVID-19 pandemic, the continuing secular decline in checks and business forms, the 2020 decision to exit certain product lines within Cloud Solutions and inflationary pressures on hourly wages, materials and delivery. Adjusted EBITDA margin decreased for the third quarter of 2021, as compared to the third quarter of 2020, driven by the planned technology investments and inflationary pressures on hourly wages, materials and delivery, as well as the mix of data-driven marketing clients, the mix of Promotional Solutions revenue and the benefit in the prior year from temporary actions taken in response to the COVID-19 pandemic.
The increase in adjusted EBITDA for the first nine months of 2020,2021, as compared to 2019, driven primarily by the impacts 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 the 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 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. We also incurred expenses related to treasury management deals signed in the fourth quarter of 2019, as well as investments in our client operations area that included human capital investments and other costs related to on-boarding new clients. Additionally, during the first nine months of 2020, we incurred incremental costs resultingwas driven primarily by the contribution from the First American acquisition of $21.5 million, new client wins in all of our segments, the continuing revenue volume recovery from the impacts of the COVID-19 of approximately $7.0pandemic, cost reductions and the $11.4 million and we recordedreduction in bad debt expense of $5.6 million related to notes receivable from our Safeguard distributors.expense. These decreasesincreases in adjusted EBITDA were partially offset by actions takenthe continuing secular decline in checks and business forms, increased costs related to reduce costsour sales and financial management tools, the net benefit in line 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 2020prior year 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 ourwe implemented in response to the COVID-19 pandemic, primarily in our sales, marketingthe 2020 decision to exit certain product lines within Cloud Solutions, and fulfillment organizations, as we continue to develop our post-COVID-19 operating model.inflationary pressures on hourly wages, materials and delivery.
Reconciliation of Non-GAAP Financial Measures
We have not reconciled the adjusted EBITDA or adjusted effective income tax rate outlook guidance for 2021 to the directly comparable GAAP financial measures because we do not provide outlook guidance for net income or pretax income or the reconciling items between these measures and 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 measures is not available without unreasonable effort. The probable significance of certain of these reconciling items is high and, based on historical experience, could be material.
Free cash flow – We define free cash flow as net cash provided by operating activities less purchases of capital assets. 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 cash 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, and acquisitions or other strategic investments.investments, and share repurchases.
Net cash provided by operating activities reconciles to free cash flow as follows:
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
Net cash provided by operating activities | Net cash provided by operating activities | | $ | 166,811 | | | $ | 208,024 | | Net cash provided by operating activities | | $ | 149,229 | | | $ | 166,811 | |
Purchases of capital assets | Purchases of capital assets | | (42,707) | | | (49,679) | | Purchases of capital assets | | (81,081) | | | (42,707) | |
Free cash flow | Free cash flow | | $ | 124,104 | | | $ | 158,345 | | Free cash flow | | $ | 68,148 | | | $ | 124,104 | |
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 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. In addition, net debt andsuggests that there isour debt obligations are 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 | |
Total debt reconciles to net debt as follows:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | September 30, 2021 | | December 31, 2020 |
Total debt | | $ | 1,776,167 | | | $ | 840,000 | |
Cash and cash equivalents | | (121,064) | | | (123,122) | |
Net debt | | $ | 1,655,103 | | | $ | 716,878 | |
Liquidity – We define liquidity as cash and cash equivalents plus the amount available for borrowing under our revolving credit facility. We consider liquidity to be an important metric for demonstrating the amount of cash that is available or that could be available on short notice. This financial measure is not a substitute for GAAP liquidity measures. Instead, we believe that this measurement enhances investors' understanding of the funds that are currently available.
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | September 30, 2021 | | December 31, 2020 |
Cash and cash equivalents | | $ | 121,064 | | | $ | 123,122 | |
Amount available for borrowing under revolving credit facility | | 312,525 | | | 302,342 | |
Liquidity | | $ | 433,589 | | | $ | 425,464 | |
Adjusted diluted EPS – By excluding the impact of non-cash items or items that we believe are not indicative of ongoing operations,current period operating performance, we believe that adjusted diluted EPS provides useful comparable information to assist in analyzing our current period operating performance and in assessing our future operating performance. As such, adjusted diluted EPS is one of the key financial performance metrics we use to assess the operating results and performance of the business and to identify strategies to improve performance. It is reasonable to expect that one or more of the excluded items will occur in future periods, but the amounts recognized may vary significantly.
Diluted earnings (loss) per share reconciles to adjusted diluted EPS as follows:
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | |
(in thousands, except per share amounts) | | (in thousands, except per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) | Net income (loss) | | $ | 29,444 | | | $ | (318,493) | | | $ | (15,809) | | | $ | (244,721) | | Net income (loss) | | $ | 12,501 | | | $ | 29,444 | | | $ | 48,955 | | | $ | (19,373) | |
Net income attributable to non-controlling interest | Net income attributable to non-controlling interest | | (27) | | | — | | | (46) | | | — | | Net income attributable to non-controlling interest | | (37) | | | (27) | | | (99) | | | (46) | |
Net income (loss) attributable to Deluxe | Net income (loss) attributable to Deluxe | | 29,417 | | | (318,493) | | | (15,855) | | | (244,721) | | Net income (loss) attributable to Deluxe | | 12,464 | | | 29,417 | | | 48,856 | | | (19,419) | |
Asset impairment charges | Asset impairment charges | | 2,760 | | | 390,980 | | | 97,973 | | | 390,980 | | Asset impairment charges | | — | | | 2,760 | | | — | | | 101,749 | |
Acquisition amortization | Acquisition amortization | | 13,618 | | | 16,372 | | | 42,031 | | | 54,229 | | Acquisition amortization | | 25,202 | | | 13,618 | | | 55,730 | | | 42,031 | |
Restructuring, integration and other costs | Restructuring, integration and other costs | | 18,941 | | | 29,723 | | | 59,064 | | | 53,699 | | Restructuring, integration and other costs | | 13,894 | | | 18,941 | | | 41,085 | | | 59,064 | |
CEO transition costs(1) | CEO transition costs(1) | | — | | | 1,145 | | | 10 | | | 8,539 | | CEO transition costs(1) | | — | | | — | | | — | | | 10 | |
Share-based compensation | | 6,240 | | | 5,356 | | | 15,335 | | | 14,016 | | |
Share-based compensation expense | | Share-based compensation expense | | 7,434 | | | 6,240 | | | 21,801 | | | 15,335 | |
Acquisition transaction costs | Acquisition transaction costs | | — | | | 13 | | | 9 | | | 193 | | Acquisition transaction costs | | 208 | | | — | | | 18,816 | | | 9 | |
Certain legal-related expense | | — | | | — | | | (2,165) | | | 6,417 | | |
Certain legal-related expense (benefit) | | Certain legal-related expense (benefit) | | 638 | | | — | | | 941 | | | (2,165) | |
Loss on sales of customer lists | Loss on sales of customer lists | | — | | | 125 | | | 18 | | | 224 | | Loss on sales of customer lists | | — | | | — | | | — | | | 18 | |
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, pretax | | Adjustments, pretax | | 47,376 | | | 41,559 | | | 138,373 | | | 216,051 | |
Income tax provision impact of pretax adjustments(1) | | Income tax provision impact of pretax adjustments(1) | | (12,027) | | | (9,396) | | | (32,199) | | | (39,951) | |
Adjustments, net of tax | Adjustments, net of tax | | 32,163 | | | 391,277 | | | 172,536 | | | 457,017 | | Adjustments, net of tax | | 35,349 | | | 32,163 | | | 106,174 | | | 176,100 | |
Adjusted net income attributable to Deluxe | Adjusted net income attributable to Deluxe | | 61,580 | | | 72,784 | | | 156,681 | | | 212,296 | | Adjusted net income attributable to Deluxe | | 47,813 | | | 61,580 | | | 155,030 | | | 156,681 | |
Income allocated to participating securities | Income allocated to participating securities | | — | | | (136) | | | (77) | | | (266) | | Income allocated to participating securities | | (35) | | | — | | | (116) | | | (77) | |
Re-measurement of share-based awards classified as liabilities | Re-measurement of share-based awards classified as liabilities | | 60 | | | 132 | | | (803) | | | 88 | | Re-measurement of share-based awards classified as liabilities | | (339) | | | 60 | | | (339) | | | (803) | |
Adjusted income attributable to Deluxe available to common shareholders | Adjusted income attributable to Deluxe available to common shareholders | | $ | 61,640 | | | $ | 72,780 | | | $ | 155,801 | | | $ | 212,118 | | Adjusted income attributable to Deluxe available to common shareholders | | $ | 47,439 | | | $ | 61,640 | | | $ | 154,575 | | | $ | 155,801 | |
| Weighted average shares and potential common shares outstanding | Weighted average shares and potential common shares outstanding | | 41,991 | | | 42,533 | | | 41,967 | | | 43,312 | | Weighted average shares and potential common shares outstanding | | 43,031 | | | 41,991 | | | 42,747 | | | 41,967 | |
Adjustment(3)(2) | Adjustment(3)(2) | | 42 | | | 120 | | | 127 | | | 125 | | Adjustment(3)(2) | | — | | | 42 | | | (11) | | | 127 | |
Adjusted weighted average shares and potential common shares outstanding | Adjusted weighted average shares and potential common shares outstanding | | 42,033 | | | 42,653 | | | 42,094 | | | 43,437 | | Adjusted weighted average shares and potential common shares outstanding | | 43,031 | | | 42,033 | | | 42,736 | | | 42,094 | |
| GAAP diluted earnings (loss) per share | GAAP diluted earnings (loss) per share | | $ | 0.70 | | | $ | (7.49) | | | $ | (0.40) | | | $ | (5.65) | | GAAP diluted earnings (loss) per share | | $ | 0.28 | | | $ | 0.70 | | | $ | 1.13 | | | $ | (0.48) | |
Adjustments, net of tax | Adjustments, net of tax | | 0.77 | | | 9.20 | | | 4.10 | | | 10.53 | | Adjustments, net of tax | | 0.82 | | | 0.77 | | | 2.49 | | | 4.18 | |
Adjusted diluted EPS | Adjusted diluted EPS | | $ | 1.47 | | | $ | 1.71 | | | $ | 3.70 | | | $ | 4.88 | | Adjusted diluted EPS | | $ | 1.10 | | | $ | 1.47 | | | $ | 3.62 | | | $ | 3.70 | |
(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-taxpretax 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 and 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)(2) 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 excludeddiffers from the GAAP calculations, because their effect was antidilutive.due to differences in the amount of dilutive securities in each calculation.
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 overallcurrent period 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.
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 | |
(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 this information to the directly comparable GAAP financial measure because we do not provide outlook guidance for net income or the reconciling items between net income and 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) | | $ | 12,501 | | | $ | 29,444 | | | $ | 48,955 | | | $ | (19,373) | |
Pretax income attributable to non-controlling interest | | (37) | | | (21) | | | (99) | | | (46) | |
Depreciation and amortization expense | | 41,906 | | | 27,972 | | | 102,929 | | | 83,065 | |
Interest expense | | 21,494 | | | 5,083 | | | 35,548 | | | 18,254 | |
Income tax provision | | 4,691 | | | 12,094 | | | 20,720 | | | 13,746 | |
Asset impairment charges | | — | | | 2,760 | | | — | | | 101,749 | |
Restructuring, integration and other costs | | 13,894 | | | 18,941 | | | 41,085 | | | 59,064 | |
CEO transition costs | | — | | | — | | | — | | | 10 | |
Share-based compensation expense | | 7,434 | | | 6,240 | | | 21,801 | | | 15,335 | |
Acquisition transaction costs | | 208 | | | — | | | 18,816 | | | 9 | |
Certain legal-related expense (benefit) | | 638 | | | — | | | 941 | | | (2,165) | |
Loss on sales of customer lists | | — | | | — | | | — | | | 18 | |
Adjusted EBITDA | | $ | 102,729 | | | $ | 102,513 | | | $ | 290,696 | | | $ | 269,666 | |
| | |
RESTRUCTURING, INTEGRATION AND OTHER COSTS |
Restructuring and integration expense consists of costs related to the consolidation and migration of certain applications and processes, including our financial sales and human resourcessales management systems. It also includes costs related to the integration of acquired businesses into our systems and processes and the rationalization of our real estate footprint.processes. These costs primarily consist of information technology consulting, project management services and internal labor, as well as other miscellaneous costs associated with our initiatives, such as training, travel and relocation.relocation and costs associated with facility closures. In addition, we recorded employee severance costs related to these initiatives, as well as our ongoing cost reduction initiatives across functional areas. Our restructuring and integration activities began to increase during the second half of 2019, as we began pursuing several initiatives designed to focus our business behind our growth strategy and to increase our efficiency. Further information regarding restructuring and integration expense can be found under the caption "Note 8:9: Restructuring and 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 costs during 2020 related to optimizing our business processes in line with our growth strategies. While we reduced certain expenditures during the first half of 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.strategy.
The majority of the employee reductions included in our restructuring and integration accruals as of September 30, 2021 are expected to be completed byin the firstfourth quarter of 2021, and we expect most of the related severance payments to be paid in the first half of 2021.by early 2022. As a result of our employee reductions, we expect to realize cost savings of approximately $17.0$40.0 million in SG&A expense and $3.0$1.0 million in total cost of revenue in 2020, compared2021, in comparison to our 20192020 results of operations. This represents a portionNote that these savings in labor costs are partially offset by increased labor costs associated with new employees, as we restructure certain activities and strive for the optimal mix of the total net cost reductions we expect to realize in 2020.employee skill sets that will support our growth strategy.
For many years, we operated 3 reportable business segments: Small Business Services, Financial Services and Direct Checks. These 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 and reflect the way we currently manage the company. The financial information presented below for our reportable business segments is consistent with that presented under the caption "Note 14:16: Business Segment Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report, where information regarding revenue from our various product and service offerings can also be found.
Payments
Results for our Payments segment were as follows:
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Total revenue | Total revenue | | $ | 74,675 | | | $ | 64,634 | | | 15.5% | | $ | 223,886 | | | $ | 193,888 | | | 15.5% | Total revenue | | $ | 160,268 | | | $ | 74,675 | | | 114.6% | | $ | 343,045 | | | $ | 223,886 | | | 53.2% |
Adjusted EBITDA | Adjusted EBITDA | | 16,746 | | | 17,199 | | | (2.6%) | | 50,352 | | | 52,037 | | | (3.2%) | Adjusted EBITDA | | 31,598 | | | 16,746 | | | 88.7% | | 71,125 | | | 50,352 | | | 41.3% |
Adjusted EBITDA margin | Adjusted EBITDA margin | | 22.4 | % | | 26.6 | % | | (4.2) pts. | | 22.5 | % | | 26.8 | % | | (4.3) pts. | Adjusted EBITDA margin | | 19.7 | % | | 22.4 | % | | (2.7) pts. | | 20.7 | % | | 22.5 | % | | (1.8) pts. |
The increases in total revenue for the third quarter and first nine months of 2020,2021, as compared to 2019,the same periods in 2020, were driven primarily by an increase in treasury management revenue of 20.9%$82.5 million from the First American acquisition for the third quarter of 20202021 and 22.1%$109.8 million for the first nine months of 2020, related2021, as well as growth in our core payments businesses, primarily digital payments, receivables management and lockbox processing. We continued with new customer implementations, some of which had been delayed, in part, due to lockbox processing outsourcing deals signedimpacts of the pandemic. We expect continued growth in this segment in the fourth quarter of 2019 and other2021, as we continue to benefit from new client wins. Partially offsetting these increases was a decrease in payroll services revenue, driven by the negative impact of the 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.implementations.
The decreasesincreases in adjusted EBITDA for the third quarter and first nine months of 2020,2021, as compared to 2019,the same periods in 2020, were driven by increased coststhe contribution of $16.3 million from the First American acquisition for the third quarter of 2021 and $21.5 million for the first nine months of 2021, as well as the revenue growth in supportour core payments businesses. In addition, adjusted EBITDA benefited from cost reduction actions. These increases in adjusted EBITDA were partially offset by continued sales and information technology investments, the benefit in the prior year of the temporary salary and other cost reductions in response to the COVID-19 pandemic and inflationary pressures on our One Deluxe strategy, includingcost structure. For the first nine months of 2021, adjusted EBITDA was also negatively impacted by costs related to the lockbox processing outsourcing deals signedwinter storms in the fourth quarter of 2019, as well as investments in our client operations area that included human capital investments and other costs related to on-boarding new clients. Partially offsetting these decreases in adjusted 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 substantially offset by actions taken to reduce costs in response to the pandemic.February 2021. Adjusted EBITDA margin decreased for boththe third quarter and first nine months of 2021, as compared to the same periods in 2020, as a result of the investments in the business and the inflationary pressures exceeded the benefit of the revenue increases. As we continue to invest in this business, we expect adjusted EBITDA margin to remain in the low 20% range for the full year and we expect some compressionanticipate that much of EBITDA marginthe inflationary pressures will be offset by price increases in the fourth quarter of 2020, due to expected customer implementation delays.future periods.
Cloud Solutions
Results for our Cloud Solutions segment were as follows:
| | | | Quarter Ended September 30, | | Nine Months Ended September 30, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Total revenue | Total revenue | | $ | 63,758 | | | $ | 79,976 | | | (20.3%) | | $ | 193,600 | | | $ | 237,178 | | | (18.4%) | Total revenue | | $ | 69,497 | | | $ | 63,758 | | | 9.0% | | $ | 199,784 | | | $ | 193,600 | | | 3.2% |
Adjusted EBITDA | Adjusted EBITDA | | 16,425 | | | 20,216 | | | (18.8%) | | 45,494 | | | 56,362 | | | (19.3%) | Adjusted EBITDA | | 19,036 | | | 16,425 | | | 15.9% | | 55,047 | | | 45,494 | | | 21.0% |
Adjusted EBITDA margin | Adjusted EBITDA margin | | 25.8 | % | | 25.3 | % | | 0.5 pts. | | 23.5 | % | | 23.8 | % | | (0.3) pts. | Adjusted EBITDA margin | | 27.4 | % | | 25.8 | % | | 1.6 pts. | | 27.6 | % | | 23.5 | % | | 4.1 pts. |
The decreasesincreases in total revenue for the third quarter and first nine months of 2020,2021, as compared to 2019,the same periods in 2020, were driven by the impact of the COVID-19 pandemic, primarilygrowth in data-driven marketing solutionsresulting from new clients and from increased marketing efforts by our banking and mortgage lending customers due to the continuation of low interest rates and an improving credit risk environment. Data-driven marketing revenue also increased as clients suspended theirmany of our customers reactivated marketing campaigns with some impactthat had been put on web hostinghold due to the COVID-19 pandemic. Overall, data-driven marketing revenue as well. Data-driven marketing revenueincreased 37.5% for the third quarter of 2020 increased 57.1% over2021 and 29.5% for 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 2020,2021, as compared to the same periods in 2020. In addition, we signed several new data-driven marketing clients during the third quarter ofthat we expect will benefit us in future periods. Within web and hosted solutions revenue, our 2020 due to our recent decisionsdecision to exit certain product lines resulted in a revenue decline of $4.8 million for the third quarter of 2021 and $17.2 million for the first nine months of 2021, as compared to the same periods in 2020. In the fourth quarter of 2021, we expect the pace of customer spending to moderate, and as a second COVID-19 wave.result, we expect mid-single digit revenue growth.
The decreases in Adjusted EBITDA and adjusted EBITDA margin for the third quarter and first nine months of 2020, as2021 increased compared to 2019, were primarilythe same periods in 2020, due to the impactrevenue growth, as well as various cost reduction actions to bring expenses in line with our post-COVID-19 operating model. In addition, adjusted EBITDA benefited from the timing and type of COVID-19, increased information technology costscustomer marketing campaigns in support of our One Deluxe strategy and the loss of web hosting and data-driven marketing revenue related to the events that occurred in the third quarter of 2019.each period. Partially offsetting these declinesincreases in adjusted EBITDA were various costwas the benefit in the prior year of the temporary salary and other reductions unrelated to ourwe implemented in response to the COVID-19 pandemic, primarily sales and marketing costs, and the benefit of actions taken in response 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 for the third quarter of 2020, as compared to 2019, as the cost reductions outpaced the revenue decline, and revenue 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 expectanticipate that adjusted EBITDA margin to remainin the fourth quarter of 2021 will be 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, | | | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Total revenue | Total revenue | | $ | 124,929 | | | $ | 156,835 | | | (20.3%) | | $ | 385,667 | | | $ | 468,209 | | | (17.6%) | Total revenue | | $ | 130,330 | | | $ | 124,929 | | | 4.3% | | $ | 389,825 | | | $ | 385,667 | | | 1.1% |
Adjusted EBITDA | Adjusted EBITDA | | 21,478 | | | 22,909 | | | (6.2%) | | 46,529 | | | 68,787 | | | (32.4%) | Adjusted EBITDA | | 17,673 | | | 21,478 | | | (17.7%) | | 56,804 | | | 46,529 | | | 22.1% |
Adjusted EBITDA margin | Adjusted EBITDA margin | | 17.2 | % | | 14.6 | % | | 2.6 pts. | | 12.1 | % | | 14.7 | % | | (2.6) pts. | Adjusted EBITDA margin | | 13.6 | % | | 17.2 | % | | (3.6) pts. | | 14.6 | % | | 12.1 | % | | 2.5 pts. |
The increases in total revenue for the third quarter and first nine months of 2021, as compared to the same periods in 2020, were driven by some recovery of volume declines resulting from the impact of the COVID-19 pandemic, as our business customers began to resume a more normal level of activity. Additionally, revenue benefited from new clients during both periods. Partially offsetting these revenue increases was the continuing secular decline in business forms, and sales of PPE decreased approximately $3.0 million for the third quarter of 2021 and $22.0 million for the first nine months of 2021, as compared to the prior year periods.
Adjusted EBITDA and adjusted EBITDA margin for the third quarter of 2021 decreased compared to the third quarter of 2020, driven by inflationary pressures on hourly wages, materials and delivery, as well as unfavorable product mix and the benefit in the prior year of temporary actions taken in response to the COVID-19 pandemic. Partially offsetting these decreases in adjusted EBITDA was revenue from new clients and the continuing recovery of volume declines resulting from the impact of the COVID-19 pandemic, as well as the benefit of various cost reduction actions.
Adjusted EBITDA and adjusted EBITDA margin for the first nine months of 2021 increased compared to the first nine months of 2020, driven by lower bad debt expense, related to notes receivable from distributors and trade accounts receivable, as well as the continuing recovery of volume declines resulting from the impact of the COVID-19 pandemic, revenue from new clients and the benefit of various cost reduction actions. These increases in adjusted EBITDA were partially offset by information technology investments, the benefit in the prior year of temporary salary and other cost reductions in response to the COVID-19 pandemic, and inflationary pressures on hourly wages, materials and delivery. We anticipate that much of the inflationary pressures will be offset by price increases in future periods. For the fourth quarter of 2021, we expect adjusted EBITDA margin to improve to the mid teens, as a result of our cost reduction actions, including changes in key distribution relationships, and the impact of price increases.
Checks
Results for our Checks segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Total revenue | | $ | 172,046 | | | $ | 176,099 | | | (2.3%) | | $ | 518,968 | | | $ | 533,135 | | | (2.7%) |
Adjusted EBITDA | | 77,254 | | | 84,954 | | | (9.1%) | | 240,979 | | | 258,392 | | | (6.7%) |
Adjusted EBITDA margin | | 44.9 | % | | 48.2 | % | | (3.3) pts. | | 46.4 | % | | 48.5 | % | | (2.1) pts. |
The decreases in total revenue for the third quarter and first nine months of 2020,2021, as compared to 2019,the same periods in 2020, were driven primarily by the expected continuing secular decline in checks. Partially offsetting this impact was the continuing recovery of volume declines resulting from the impact of the COVID-19 pandemic, primarily business check volumes, as our small business and enterprise customers strugglewell as the impact of new client wins. We anticipate that the revenue decline for the full year will be 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.low-single digits.
The decreases in Adjustedadjusted EBITDA and adjusted EBITDA margin for the third quarter and first nine months of 2020,2021, as compared to 2019,the same periods in 2020, were primarily driven by the loss of revenue resulting from the COVID-19 pandemic, investments in support of our One Deluxe strategy, primarily information technology investments, inflationary pressures on hourly wages, materials and sales force expenses,delivery, 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 notes receivable from our Safeguard distributors, primarily one that was underperforming prior to the commencement of the COVID-19 pandemic.revenue decline. These decreases in adjusted EBITDA were partially offset by the benefit of actions taken in response to COVID-19, various cost reductions unrelated to our response to the COVID-19 pandemic, primarily sales, marketingreduction initiatives 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,lower bad debt expense and investments inexpense. Going forward, we expect that selective price increases will help mitigate the inflationary pressures on our transformation more than offset the benefit of actions taken in response to COVID-19 and the other cost savings realized during the period.structure.
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 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.
The decreases in Adjusted EBITDA for the third quarter and first nine months of 2020, as compared to 2019, were driven by 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, 2020,2021, we held cash and cash equivalents of $310.4$121.1 million, as well as restricted cash and restricted cash equivalents included in funds held for customers and in other non-current assets of $89.6$132.0 million. The following table shows our cash flow activity for the nine months ended September 30, 20202021 and 2019,2020, 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, | | | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | | 2020 | | 2019 | | Change | (in thousands) | | | 2021 | | 2020 | | Change |
Net cash provided by operating activities | Net cash provided by operating activities | | | $ | 166,811 | | | $ | 208,024 | | | $ | (41,213) | | Net cash provided by operating activities | | | $ | 149,229 | | | $ | 166,811 | | | $ | (17,582) | |
Net cash used by investing activities | Net cash used by investing activities | | | (31,668) | | | (46,532) | | | 14,864 | | Net cash used by investing activities | | | (1,036,361) | | | (31,668) | | | (1,004,693) | |
Net cash provided (used) by financing activities | | | 93,359 | | | (157,244) | | | 250,603 | | |
Net cash provided by financing activities | | Net cash provided by financing activities | | | 911,620 | | | 93,359 | | | 818,261 | |
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | | | (3,297) | | | 2,604 | | | (5,901) | | Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | | | (793) | | | (3,297) | | | 2,504 | |
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | | $ | 225,205 | | | $ | 6,852 | | | $ | 218,353 | | Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | | $ | 23,695 | | | $ | 225,205 | | | $ | (201,510) | |
Free cash flow(1) | Free cash flow(1) | | | $ | 124,104 | | | $ | 158,345 | | | $ | (34,241) | | Free cash flow(1) | | | $ | 68,148 | | | $ | 124,104 | | | $ | (55,956) | |
(1) See the Reconciliation of Non-GAAP Financial Measures within the Consolidated Results of Operations section, which defines and illustrates how we calculate free cash flow.
To maintain liquidityNet cash provided by operating activities decreased $17.6 million for the first nine months of 2021, as compared to the first nine months of 2020, driven primarily by investments in our business, including transaction costs related to the acquisition of First American and increased subscription and implementation costs related to SaaS solutions we wereare utilizing, including a new enterprise resource planning system. Additionally, operating cash flow was negatively impacted by the COVID-19 pandemic, we took steps to reduce discretionary spendingcontinuing secular decline in checks and other expenditures in line with revenue declines. These steps included temporary salary reductions for all salaried employees, including our leadership teambusiness forms and boardthe prior year benefited from the deferral 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 actionsAct and our stronger than expected performance, free cash flow for the first nine months of 2020 was $124.1 million, as compared to $158.3 million for the first nine months of 2019. This allowed us to end thefrom temporary salary and other cost reductions effective July 1, 2020. In addition, we repaid $100.0 million ofimplemented in response to 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 by the loss of revenue resulting from COVID-19 pandemic, increased investments in support of our One Deluxe strategy and the continuing secular decline in checks and forms.pandemic. These decreases in operating cash flow were partially offset by a $29.2the contribution from First American, improved working capital management, the benefit of new clients and various cost saving actions, and the continuing recovery of revenue declines from the COVID-19 pandemic. Additionally, performance-based compensation payments decreased $8.6 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 that was accrued in the previous year and delays in U.S. federal payroll tax payments of $9.2 million allowed under the CARES Act.based on our 2020 performance.
Included in net cash provided by operating activities were the following operating cash outflows:
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change |
Prepaid product discount payments | Prepaid product discount payments | | $ | 24,947 | | | $ | 20,370 | | | $ | 4,577 | | Prepaid product discount payments | | $ | 27,049 | | | $ | 24,947 | | | $ | 2,102 | |
Interest payments | | Interest payments | | 18,179 | | | 17,929 | | | 250 | |
Income tax payments | | Income tax payments | | 16,768 | | | 18,175 | | | (1,407) | |
Performance-based compensation payments(1) | Performance-based compensation payments(1) | | 20,799 | | | 23,454 | | | (2,655) | | Performance-based compensation payments(1) | | 12,192 | | | 20,799 | | | (8,607) | |
Income tax payments | | 18,175 | | | 47,378 | | | (29,203) | | |
Interest payments | | 17,929 | | | 26,110 | | | (8,181) | | |
Severance payments | Severance payments | | 11,985 | | | 6,835 | | | 5,150 | | Severance payments | | 8,632 | | | 11,985 | | | (3,353) | |
(1) Amounts reflect compensation based on total company performance.
Net cash used by investing activities for the first nine months of 20202021 was $14.9$1,004.7 million lowerhigher than 2019,the first nine months of 2020, driven primarily by the acquisition of First American, an increase in purchases of capital assets of $38.4 million, as we continue to invest in our business, and a decrease of $7.1 million in proceeds from facility sales resulting from the salecontinuing evaluation of facilities of $9.7 million in 2020 and a reduction in capital purchases of $7.0 million in 2020, partly due to project delays earlier in the year in response to the COVID-19 pandemic.our real estate footprint.
Net cash provided by financing activities for the first nine months of 20202021 was $250.6$818.3 million higher than 2019, due primarilythe first nine months of 2020, driven by net proceeds from the debt we issued to acomplete the First American acquisition. Also contributing to the increase was the net increasechange in borrowings on long-term debt of $142.5 millioncustomer funds obligations in each period and a decrease in common share repurchases of $104.5 million. In March$14.0 million, as we suspended our share repurchase program in the second quarter of 2020 in response to the COVID-19 pandemic, we drew an additional $238.0pandemic. Proceeds from issuing shares increased $13.0 million, onas certain employees of First American purchased our $1.15 billion revolving credit facility. We repaid $100.0 million of this amountstock in July 2020, and we repaid an additional $140.0 millionconjunction with the acquisition in October 2020. Also in response to the COVID-19 pandemic, we did not repurchase any of our shares during the second or third quartersquarter of 2020.2021.
Significant cash transactions, excluding those related to operating activities, for each period were as follows:
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change |
Payment for acquisition, net of cash, cash equivalents, restricted cash and restricted cash equivalents acquired | | Payment for acquisition, net of cash, cash equivalents, restricted cash and restricted cash equivalents acquired | | $ | (956,717) | | | $ | — | | | $ | (956,717) | |
Net change in debt | Net change in debt | | $ | 156,500 | | | $ | 14,000 | | | $ | 142,500 | | Net change in debt | | 949,412 | | | 156,500 | | | 792,912 | |
Proceeds from sale of facilities | | 9,713 | | | — | | | 9,713 | | |
Purchases of capital assets | Purchases of capital assets | | (42,707) | | | (49,679) | | | 6,972 | | Purchases of capital assets | | (81,081) | | | (42,707) | | | (38,374) | |
Cash dividends paid to shareholders | Cash dividends paid to shareholders | | (38,057) | | | (39,068) | | | 1,011 | | Cash dividends paid to shareholders | | (38,695) | | | (38,057) | | | (638) | |
Payments for debt issuance costs | | Payments for debt issuance costs | | (18,153) | | | — | | | (18,153) | |
Proceeds from issuing shares | | Proceeds from issuing shares | | 16,031 | | | 3,048 | | | 12,983 | |
Net change in customer funds obligations | | Net change in customer funds obligations | | 14,913 | | | (9,375) | | | 24,288 | |
Payments for common shares repurchased | Payments for common shares repurchased | | (14,000) | | | (118,547) | | | 104,547 | | Payments for common shares repurchased | | — | | | (14,000) | | | 14,000 | |
Net change in customer funds obligations | | (9,375) | | | (8,711) | | | (664) | | |
Proceeds from sales of facilities | | Proceeds from sales of facilities | | 2,648 | | | 9,713 | | | (7,065) | |
|
As of September 30, 2020,2021, our foreign subsidiaries held cash and cash equivalents of $89.1$120.8 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 U.S. at one time, we estimate we would incur a foreign withholding tax liability of approximately $4.0 million.$6.0 million, notwithstanding any tax planning strategies that might be available.
As of September 30, 2020, $102.62021, $312.5 million was available for borrowing under our $1.15 billion$500.0 million 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 anticipate that net cash generated by operations, along with the cash and cash equivalents on hand and availability onunder our credit facility, will be sufficient to support our operations and to meet our financial commitmentsdebt service requirements for the next 12 months. We anticipate that we will continue to pay our regular quarterly dividend. However, dividends are approved by our board of directors each quarter and thus, are subject to change.
Our totalThe principal amount of our debt obligations was $1,040.0 million$1.80 billion as of September 30, 2020, an increase2021 and $840.0 million as of $156.5 million from December 31, 2019, as we drew an additional amount on our line of credit in response to the COVID-19 pandemic.2020. Further information concerning our outstanding debt can be found under the caption “Note 11:12: 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, 2020 | | December 31, 2019 | | | | | September 30, 2021 | | December 31, 2020 | | |
(in thousands) | (in thousands) | | Amount | | Weighted- average interest rate | | Amount | | Weighted- average interest rate | | Change | (in thousands) | | Amount | | Weighted- average interest rate | | Amount | | Weighted- average interest rate | | Change |
Fixed interest rate(1) | Fixed interest rate(1) | | $ | 200,000 | | | 3.3 | % | | $ | 200,000 | | | 3.2 | % | | $ | — | | Fixed interest rate(1) | | $ | 200,000 | | | 4.0 | % | | $ | 200,000 | | | 3.3 | % | | $ | — | |
Floating interest rate | Floating interest rate | | 840,000 | | | 1.6 | % | | 683,500 | | | 3.0 | % | | 156,500 | | Floating interest rate | | 1,596,563 | | | 4.1 | % | | 640,000 | | | 1.6 | % | | 956,563 | |
Total debt | | 1,040,000 | | | 1.9 | % | | 883,500 | | | 3.0 | % | | 156,500 | | |
Debt principal | | Debt principal | | 1,796,563 | | | 4.1 | % | | 840,000 | | | 2.0 | % | | 956,563 | |
Shareholders’ equity | Shareholders’ equity | | 511,444 | | | | | 570,861 | | | | | (59,417) | | Shareholders’ equity | | 557,866 | | | | | 513,392 | | | | | 44,474 | |
Total capital | Total capital | | $ | 1,551,444 | | | | | $ | 1,454,361 | | | | | $ | 97,083 | | Total capital | | $ | 2,354,429 | | | | | $ | 1,353,392 | | | | | $ | 1,001,037 | |
(1) The fixed interest rate amount representsincludes the amount drawnoutstanding under our revolving credit facilityvariable-rate debt 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 theour credit facility agreement.facility.
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 quartersfirst nine months of 2020. During the first quarter of 2020, we repurchased 0.5 million shares for $14.0 million. As of September 30, 2020,2021 and $287.5 million remained available for repurchase under the authorization.this authorization as of September 30, 2021. 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 September 30, 2020, the2021, total availabilitycommitments under our revolving credit facility was $1.15 billion. The facility includes an accordion feature allowing us, subject to lender consent, to increase the credit commitment to an aggregate amount not exceeding $1.425 billion.were $500.0 million. The credit facility matures in March 2023.June 2026. Our quarterly commitment fee ranges from 0.175%0.25% 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 maximumtotal 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,agreement.
Information regarding the terms and maturities of 3.0. Additionally,our debt, as well as our debt covenants, can be found under the agreement contains customary representations and warranties including, as a conditioncaption "Note 12: Debt" in the Condensed Notes to borrowing, that all such representations and warranties are true and correctUnaudited Consolidated Financial Statements appearing in all material respects on the datePart I, Item 1 of the borrowing, including representations as to no material adverse change in our business, assets, operations or financial condition.this report. We were in compliance with allour debt covenants as of September 30, 2020,2021, and we anticipate that we will remain in compliance with our debt covenants throughout the next 12 months. Under the terms of our credit facility, if our consolidated total leverage ratio exceeds 2.75 to 1.00, the aggregate annual amount of permitted dividends and share repurchases is limited to $60.0 million.
The following table showsAs of September 30, 2021, amounts were available for borrowing under our revolving credit facility 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.follows:
| | | | | |
(in thousands) | Total
available |
Revolving credit facility commitment | $ | 1,150,000500,000 | |
AmountAmounts drawn on revolving credit facility | (1,040,000)(180,000) | |
Outstanding letters of credit(1) | (7,428)(7,475) | |
Net available for borrowing as of September 30, 20202021 | $ | 102,572312,525 | |
(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 |
Information concerning items comprising selected captions on our consolidated balance sheets can be found under the caption "Note 3: Supplemental Balance Sheet and Cash Flow Information" and information regarding the impact of the First American acquisition on our consolidated balance sheet as of September 30, 2021 can be found under the caption "Note 6: Acquisition," both of which appear in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
Finance lease – During the third quarter of 2021, a lease for a facility located in Minnesota commenced and was recorded on the consolidated balance sheet as a finance lease. The lease resulted in an increase in property, plant and equipment and an increase in lease obligations of $26.9 million. Further information regarding our finance leases, including their maturities, can be found under the caption "Note 13: Leases" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
Prepaid product discounts – Other non-current assets include prepaid product discounts that are recorded 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, 20202021 and 20192020 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 Part I, Item 1 of this report. Cash payments for prepaid product discounts were $27.0 million for the first nine months of 2021 and $24.9 million for the first nine months of 2020 and $20.4 million for the first nine months of 2019.2020.
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 the consolidated balance sheets. These accruals were $6.0$11.8 million as of September 30, 20202021 and $14.7$14.4 million as of December 31, 2019. Accruals for prepaid product discount payments included in other non-current liabilities on the consolidated balance sheets were $0.2 million as of September 30, 2020 and $3.7 million as of December 31, 2019.2020.
| | |
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND CONTRACTUAL OBLIGATIONS |
It is not our general business practice to enter into off-balance sheet arrangements or to guarantee the performance of third parties. In the normal course of business we periodically enter into agreements that incorporate general indemnification language. These indemnifications 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 fees 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, 20202021 or December 31, 2019.2020. Further information regarding our liabilities related to self-insurance and litigation can be found under the caption “Note 12:14: Other Commitments and Contingencies” in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part 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. We have not established any special purpose entities other than our agreement to form MedPay Exchange LLC (MPX), doing business as Medical Payment Exchange, 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: Significant Accounting Policies" in the Notes to Consolidated Financial Statements"Statements appearing in the 2020 Form 10-K. We did not enter into any material related party transactions during the first nine months of 2021 or during 2020.
A table of our contractual obligations was provided in the MD&A section of the 2020 Form 10-K. During the first quarter of 2021, we extended a SaaS contract and in October 2021, we executed an outsourcing services contract. These contracts increased our contractual obligations by approximately $64.0 million. Of this amount, approximately $34.0 million is payable in 2021 through 2022, with the remainder payable in 2023 through 2024.
During the second quarter of 2021, we issued new debt to fund the acquisition of First American. Information regarding the maturities of our debt obligations can be found under the caption "Note 12: Debt" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. In addition,conjunction with the First American acquisition, we did not enter into any material related party transactions during the first nine monthsassumed operating lease liabilities of 2020 or during 2019.
A table of our contractual obligations was provided in the MD&A section of the 2019 Form 10-K. During the first nine months of 2020, amounts drawn under our revolving credit facility increased $156.5$24.4 million, as discussed in Capital Resources. We repaid $140.0 million of the amount outstanding on our credit facility in October 2020. In addition,and during the third quarter of 2020, we executed leases2021, a finance lease on 2 new facilities,a facility located in Georgia and Minnesota with termscommenced. Information regarding the maturities of 6 and 16 years, respectively. As a
result, our total lease obligations increased approximately $65.0 million,can be found under the caption "Note 13: Leases" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. Purchase obligations assumed in conjunction with approximately $5.0 million due in 2021 - 2022, approximately $13.0 million due in 2023 - 2024, and the remainder due through 2037. As these leases haveFirst American acquisition were not yet commenced, they are not reflected on our consolidated balance sheet as of September 30, 2020.significant.
| | |
CRITICAL ACCOUNTING POLICIES |
A description of our critical accounting policies was provided in the MD&A section of the 20192020 Form 10-K. There were no changes in these policies during the first nine months of 2020.
First quarter 20202021. Information regarding the goodwill impairment analyses– Effective 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 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 $35.0 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 January 1, 2020, indicated that the estimated fair values of our reporting units exceeded their carrying values by approximate amounts between $37.0 million and $954.0 million, or by amounts between 121% and 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 either reporting unit was less than its carrying amount.
We elected to perform quantitative analyses for our other 2 reporting units: Cloud Data Analytics and Promotional Solutions. These quantitative analyses indicated that the estimated fair values of these reporting units exceeded their carrying values by approximately $100.0 million and $210.0 million, or by 63% and 132% above the carrying values of their net assets. As such, no goodwill impairment charges were recorded as a result of our annual impairment analysis. This impairment assessment is sensitive to changes in forecasted cash flows, as well as our selected discount rate of 11%. Changes in the reporting units' forecast assumptions and estimates could materially affect the estimation of the fair value of 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 results of operations. This uncertainty affected several of the assumptions made and estimates used in the preparation of our 2020 consolidated financial statements. Further informationduring 2021 can be found under the caption “Note 15: Risks and Uncertainties”"Note 8: Fair Value Measurements" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report, as well as in Part II, Item 1A of this report.
New accounting pronouncements – Information regarding the accounting pronouncementspronouncement adopted during the first nine months of 20202021 and thosethe pronouncement not yet adopted can be found under the caption “Note 2: New 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 |
Interest rate 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.operations and investments. 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. factors
During the second quarter of 2021, we executed a new credit agreement that provides for a 5-year revolving credit facility with commitments of $500.0 million and a term loan facility in the amount of $1.155 billion. Our previous credit agreement was terminated contemporaneously with our entry into the new credit agreement and was repaid utilizing proceeds from the new credit facility. Interest is payable on amounts outstanding under the new credit facility at a fluctuating rate of interest determined by reference to the eurodollar rate plus an applicable margin ranging from 1.5% to 2.5%, depending on our total leverage ratio, as defined in the credit agreement. Also during the second quarter of 2021, we issued $500.0 million of 8.0% senior, unsecured notes. Proceeds from this offering, net of discount and debt issuance costs, were $490.7 million, resulting in an effective interest rate of 8.3%.
As of September 30, 2020,2021, our total debt outstanding was comprisedas follows:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Carrying amount(1) | | Fair value(2) | | Interest rate(3) |
Senior, secured term loan facility | | $ | 1,105,150 | | | $ | 1,116,563 | | | 2.4 | % |
Senior, unsecured notes | | 491,017 | | | 525,150 | | | 8.0 | % |
Amounts drawn on revolving credit facility | | 180,000 | | | 180,000 | | | 2.4 | % |
Total debt | | $ | 1,776,167 | | | $ | 1,821,713 | | | 4.1 | % |
(1) The carrying amount has been reduced by unamortized discount and debt issuance costs of $1.04 billion drawn$20.4 million.
(2) For the amounts outstanding under our revolving credit facility at a weighted-averageagreement, fair value approximates carrying value because the interest rate of 1.9%. The interest rate on the majority of the amount drawn under our revolving credit facility is variable and reflects current market rates. As such,The fair value of the related carrying amount reportedsenior, unsecured notes is based on quoted prices in active markets for the consolidated balance sheets approximates fair value. Amounts drawnidentical liability when traded as an asset.
(3) The interest rate presented for total debt includes the impact of the interest rate swap discussed below.
The credit agreement matures on ourJune 1, 2026, at which time any amounts outstanding under the revolving credit facility must be repaid. The term loan facility requires periodic principal payments through June 1, 2026, and the senior, unsecured notes mature in March 2023.June 2029. Information regarding the maturities of our long-term debt can be found under the caption "Note 12: Debt" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
As part of our interest rate risk management strategy, in July 2019, we entered into an interest rate swap in July 2019, 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.variable-rate debt. The interest rate swap, which terminates in March 2023, when our revolving credit facility matures, effectively converts $200.0 million of variable ratevariable-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 sheets and are subsequently reclassified to interest expense as interest payments are made on the variable-rate debt. The fair value of the interest rate swap was $8.0$4.7 million as of September 30, 20202021 and $1.5$7.2 million as of December 31, 20192020 and was included in other non-current liabilities on the consolidated balance sheets.
Based on the daily average amount of variable-rate debt outstanding, debt, a one percentage point change in our weighted-average interest ratesrate would have resulted in a $6.3an $8.0 million change in interest expense for the first nine months of 2020.2021.
Foreign currency exchange rate risk – 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 |
(a) Disclosure Controls and Procedures – As of the end of the period covered by this report, September 30, 20202021 (the 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)). 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, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
| | |
ITEM 1. LEGAL PROCEEDINGS |
We record 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. RecordedAs of September 30, 2021, 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.
Our risk factors are outlined in Part I, Item 1A of the 20192020 Form 10-K. There have been no significant changes to these risk factors since we filed the 20192020 Form 10-K, except for the itemitems discussed here.
A pending investigation by the Federal Trade Commission into certain business practices of First American could materially and adversely affect our business.
Three operating subsidiaries of First American received separate Civil Investigative Demands dated December 27, 2019 from the Federal Trade Commission (the FTC) requesting information and documents to determine whether the subsidiaries may have engaged in conduct prohibited by the Federal Trade Commission Act, the Fair Credit Reporting Act or the Duties of Furnishers of Information. The impactFTC has not yet made any determination against the subsidiaries, and we are currently unable to predict the eventual scope, ultimate timing or outcome of COVID-19 has adversely affected,its investigation.
We are entitled to limited indemnification under the merger agreement related to the acquisition of First American for certain expenses and losses, if any, that may be incurred after the consummation of the acquisition with respect to certain matters, including the FTC investigation. The right to indemnification for any such expenses and losses is expectedlimited to continuethe amount of an indemnity holdback and, except in the case of fraud, is our sole recourse for such losses. There can be no assurance that such indemnification will be sufficient to address all losses that may arise from such matters, or that the FTC’s pending investigation will not result in findings or alleged violations of laws that could lead to enforcement actions, proceedings or litigation, whether by the FTC, other state or federal agencies, or other parties. The imposition of damages, fines, restitution, other equitable monetary relief or changes to our business practices or operations could materially and adversely affect our business, financial condition, and results of operations.operations or reputation.
The COVID-19 pandemic beganWe may be unable to impact our operations late insuccessfully integrate First American’s business and realize 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 becauseanticipated benefits 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.acquisition.
BecauseWe are devoting significant management attention and resources to integrating the current economic environment is significantly impacting small businesses,business practices and operations of First American. Potential difficulties we are closely monitoring the breadth and depth of small business closures and bankruptcies, changesmay encounter in the level of small business optimism, lendingintegration process include the following:
•the inability to small and mid-sizedsuccessfully combine the businesses andin a manner that permits us to achieve the general functioningcost savings or revenue enhancements anticipated to result from the acquisition, which would result in the anticipated benefits of the credit markets, adoption of government stimulus and other economic programs, consumer unemployment levels and changesacquisition not being realized in consumer spending patterns. We cannot predict the pacetime frame currently anticipated or at all;
at which these factors will improve
•lost sales and customers as a result of certain customers, retail partners, financial institutions or the impact a prolonged downturn in the economy will have on ourother third parties deciding not to do business financial condition and/or results of operations.with us;
We also incurred, and may continue to incur, additional costs as we respond to •the pandemic, 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 costscomplexities associated with additional cleaningmanaging out of several different locations and disinfecting of our facilities.integrating personnel from First American, resulting in a significantly larger combined company, while at the same time attempting to provide consistent, high quality products and services;
All•the additional complexities 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,integrating a company with different products, services, markets 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.customers;
If demand for our products•coordinating corporate and services further deteriorates or does not return to normal levels in the longer term, we may be required to pursue additional sources of financing 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,administrative infrastructures and we believe we could also currently access the capital markets. However, such financing is not guaranteed and is largely dependent on market conditions and other factors that exist at the time we seek to access such financing. Further actions may be required to improve our 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.harmonizing insurance coverage;
The situation surrounding COVID-19 remains fluid•coordinating accounting, information technology, communications, administration and other systems;
•complexities associated with implementing necessary controls for First American’s business activities to address our requirements as a public company;
•identifying and eliminating redundant and underperforming functions and assets;
•difficulty addressing possible differences in corporate culture and management philosophies;
•performance shortfalls as a result of the potential fordiversion of management’s attention to efforts to integrate First American’s operations; and
•deterioration of credit ratings.
For all of these reasons, it is possible that the integration process could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our products, services, standards, controls, procedures and policies, any of which could materially and adversely affect our ability to maintain relationships with customers, retail partners, financial institutions, vendors and employees or to achieve the anticipated benefits of the acquisition, or could otherwise materially and adversely affect our business and financial results. An inability to realize the full extent of the anticipated benefits of the acquisition of First American, as well as any delays encountered in the integration process, could have a material impactadverse effect on our results of operations, financial conditionrevenue, expenses and liquidity increases the longer the virus impacts activity levels in the U.S. and the other countries in which we operate. For this reason, we cannot reasonably estimate with any degree of certainty the future impact the pandemic may have on our results of operations, financial 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 yet 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 may require new business formations and/or the expansion of sales to our existing customers.operating results.
In completing asset impairment analyses duringaddition, the first quarter of 2020, we were required to make assumptions usingintegration may result in additional and unforeseen expenses, and the best information available at the time, including the performanceanticipated benefit of our reporting units subsequentplan for integration may not be realized. Actual synergies, if achieved at all, may be lower than what we expect and may take longer to achieve than anticipated. For example, the declarationelimination of a pandemic and available economic forecasts. These assumptionsduplicative costs may not be possible or may take longer than anticipated, a sharp declineor the benefits from the acquisition may be offset by costs incurred or delays in gross domestic product and a material decline inintegrating the number of small businesses. To the extent our assumptions differ materially and negatively from actual events,companies. If we are not able to adequately address these challenges, we may be requiredunable to record additional asset impairment charges.
Other cascading effectssuccessfully integrate First American’s operations into our own or, even if we are able to combine the two business operations successfully, to realize the anticipated benefits of the COVID-19 pandemic that are not currently foreseeable could materially increase our costs, negatively impact our revenue and 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 have the effect of heightening manyintegration 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.two companies.
| | |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table shows purchases of our common stock that were completed during the third quarter of 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 number (or approximate dollar value) of shares that may yet be purchased under the plans or programs |
July 1, 2021 – July 31, 2021 | | 4,511 | | | $ | 44.19 | | | 4,511 | | | — | |
August 1, 2021 – August 31, 2021 | | 2,942 | | | 41.26 | | | 2,942 | | | — |
September 1, 2021 – September 30, 2021 | | 3,762 | | | 37.73 | | | 3,762 | | | — |
Total | | 11,215 | | | 41.26 | | | 11,215 | | | — |
At times, we 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 2021, we withheld 11,215 shares, with an average price of $41.26 per share, in conjunction with the vesting and exercise of equity-based awards.
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 20202021 and $287.5 million remained available for repurchase as of September 30, 2020.2021.
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 2020, we withheld 5,534 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.
| | | | | | | | |
Exhibit Number | | Description |
10.1 | | |
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 |
| | | | | | | | |
Exhibit Number | | Description |
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.
| | | | | |
| DELUXE CORPORATION (Registrant) |
| |
Date: November 6, 20205, 2021 | /s/ Barry C. McCarthy |
| Barry C. McCarthy President and Chief Executive Officer (Principal Executive Officer) |
| |
Date: November 6, 20205, 2021 | /s/ Keith A. BushScott C. Bomar |
| Keith A. BushScott C. Bomar Senior Vice President, Chief Financial Officer (Principal Financial Officer) |
| |
Date: November 6, 20205, 2021 | /s/ Ronald Van Houwelingen |
| Ronald Van Houwelingen Vice President, Corporate Controller (Principal Accounting Officer) |