SEC Info - Deluxe Corp. - ‘10-Q’ for 3/31/22

ASSETS

Current assets:

Cash and cash equivalents

i 44,059

i 41,231

Trade accounts receivable, net of allowance for credit losses

i 184,335

i 197,947

Inventories and supplies

i 34,527

i 34,928

Funds held for customers, including securities carried at fair value of $ i 13,027 and $ i 13,307, respectively

i 156,752

i 254,795

Prepaid expenses

i 47,964

i 37,643

Revenue in excess of billings

i 33,689

i 30,393

Other current assets

i 16,858

i 23,536

Total current assets

i 518,184

i 620,473

Deferred income taxes

i 1,957

i 2,180

Long-term investments

i 47,380

i 47,201

Property, plant and equipment, net of accumulated depreciation of $ i 341,046 and $ i 338,617, respectively

i 124,270

i 125,966

Operating lease assets

i 53,375

i 58,236

Intangibles, net of accumulated amortization of $ i 718,169 and $ i 698,764, respectively

i 499,531

i 510,724

Goodwill

i 1,430,156

i 1,430,141

Other non-current assets

i 279,456

i 279,463

Total assets

i 2,954,309

i 3,074,384

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

i 146,267

i 153,072

Funds held for customers

i 155,955

i 256,257

Accrued liabilities

i 201,913

i 216,832

Current portion of long-term debt

i 57,227

i 57,197

Total current liabilities

i 561,362

i 683,358

Long-term debt

i 1,635,191

i 1,625,752

Operating lease liabilities

i 53,418

i 56,444

Deferred income taxes

i 68,324

i 75,121

Other non-current liabilities

i 56,999

i 59,111

Commitments and contingencies (Note 13)

Shareholders' equity:

Common shares $ i i 1 / par value (authorized: i i 500,000 / shares; outstanding: March 31, 2022 – i 42,923; December 31, 2021 – i 42,679)

i 42,923

i 42,679

Additional paid-in capital

i 62,676

i 57,368

Retained earnings

i 502,125

i 505,763

Accumulated other comprehensive loss

( i 29,025)

( i 31,492)

Non-controlling interest

i 316

i 280

Total shareholders’ equity

i 579,015

i 574,598

Total liabilities and shareholders’ equity

i 2,954,309

i 3,074,384

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Quarter Ended
March 31,

(in thousands, except per share amounts)

2022

2021

Product revenue

i 317,303

i 299,053

Service revenue

i 238,712

i 142,211

Total revenue

i 556,015

i 441,264

Cost of products

( i 114,361)

( i 107,325)

Cost of services

( i 134,833)

( i 71,184)

Total cost of revenue

( i 249,194)

( i 178,509)

Gross profit

i 306,821

i 262,755

Selling, general and administrative expense

( i 259,699)

( i 212,436)

Restructuring and integration expense

( i 16,244)

( i 14,313)

Operating income

i 30,878

i 36,006

Interest expense

( i 20,324)

( i 4,524)

Other income

i 2,004

i 2,033

Income before income taxes

i 12,558

i 33,515

Income tax provision

( i 2,878)

( i 9,190)

Net income

i 9,680

i 24,325

Net income attributable to non-controlling interest

( i 36)

( i 33)

Net income attributable to Deluxe

i 9,644

i 24,292

Total comprehensive income

i 12,147

i 25,934

Comprehensive income attributable to Deluxe

i 12,111

i 25,901

Basic earnings per share

i 0.23

i 0.58

Diluted earnings per share

i 0.22

i 0.57

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, December 31, 2021

i 42,679

i 57,368

i 505,763

( i 31,492)

i 280

i 574,598

Net income

—

i 9,644

—

i 36

i 9,680

Cash dividends ($ i 0.30 per share)

—

( i 13,282)

—

( i 13,282)

Common shares issued

i 379

i 1,152

—

i 1,531

Common shares retired

( i 135)

( i 4,026)

—

( i 4,161)

Employee share-based compensation

—

i 8,182

—

i 8,182

Other comprehensive income

—

i 2,467

—

i 2,467

Balance, March 31, 2022

i 42,923

i 62,676

i 502,125

( i 29,025)

i 316

i 579,015

(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

i 41,973

i 17,558

i 522,599

( i 41,433)

i 141

i 540,838

Net income

—

i 24,292

—

i 33

i 24,325

Cash dividends ($ i 0.30 per share)

—

( i 12,832)

—

( i 12,832)

Common shares issued

i 194

i 847

—

i 1,041

Common shares retired

( i 63)

( i 2,298)

—

( i 2,361)

Employee share-based compensation

—

i 6,199

—

i 6,199

Other comprehensive income

—

i 1,609

—

i 1,609

Balance, March 31, 2021

i 42,104

i 22,306

i 534,059

( i 39,824)

i 174

i 558,819

See Condensed Notes to Unaudited Consolidated Financial Statements


DELUXE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Quarter Ended March 31,

(in thousands)

2022

2021

Cash flows from operating activities:

Net income

i 9,680

i 24,325

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

i 5,438

i 4,516

Amortization of intangibles

i 36,159

i 23,264

Operating lease expense

i 5,570

i 4,576

Amortization of prepaid product discounts

i 8,924

i 7,440

Deferred income taxes

( i 7,524)

i 5,245

Employee share-based compensation expense

i 8,142

i 6,742

Other non-cash items, net

i 8,213

i 2,418

Changes in assets and liabilities:

Trade accounts receivable

i 12,248

i 23,122

Inventories and supplies

( i 893)

i 1,042

Other current assets

( i 12,731)

( i 19,711)

Payments for cloud computing arrangement implementation costs

( i 6,391)

( i 8,915)

Other non-current assets

( i 3,082)

( i 953)

Accounts payable

( i 5,003)

( i 3,543)

Prepaid product discount payments

( i 7,859)

( i 9,590)

Other accrued and non-current liabilities

( i 16,626)

( i 20,397)

Net cash provided by operating activities

i 34,265

i 39,581

Cash flows from investing activities:

Purchases of capital assets

( i 20,844)

( i 21,670)

Other

i 515

( i 180)

Net cash used by investing activities

( i 20,329)

( i 21,850)

Cash flows from financing activities:

Proceeds from issuing long-term debt and swingline loans

i 146,500

i 5,000

Payments on long-term debt and swingline loans

( i 137,938)

( i 5,000)

Net change in customer funds obligations

( i 99,240)

i 1,659

Proceeds from issuing shares

i 798

i 673

Employee taxes paid for shares withheld

( i 4,161)

( i 2,360)

Cash dividends paid to shareholders

( i 13,317)

( i 12,932)

Other

( i 2,610)

( i 1,271)

Net cash used by financing activities

( i 109,968)

( i 14,231)

Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents

i 1,320

i 1,606

Net change in cash, cash equivalents, restricted cash and restricted cash equivalents

( i 94,712)

i 5,106

Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year

i 285,491

i 229,409

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3)

i 190,779

i 234,515

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 March 31, 2022, the consolidated statements of comprehensive income for the quarters ended March 31, 2022 and 2021, the consolidated statements of shareholders’ equity for the quarters ended March 31, 2022 and 2021 and the consolidated statements of cash flows for the quarters ended March 31, 2022 and 2021 are unaudited. The consolidated balance sheet as of December 31, 2021 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, 2021 (the 2021 Form 10-K).

The preparation of our consolidated financial statements requires us to make certain estimates and assumptions affecting the amounts reported in the consolidated financial statements and related notes. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Actual results may differ significantly from our estimates and assumptions.

Comparability – The consolidated statement of cash flows for the quarter ended March 31, 2021 has been modified to confirm to the current year presentation. We presented payments for cloud computing arrangement implementation costs separately within cash flows from operating activities. Previously, this amount was included in other non-current assets. Also, we included purchases of and proceeds from customer funds marketable securities within other investing activities. Previously, these amounts were presented separately. During the quarter ended March 31, 2022, we recorded out-of-period correcting adjustments that decreased net income attributable to Deluxe by $ i 2,197. These adjustments were not material to any historical interim or annual period.


NOTE 2: NEW ACCOUNTING PRONOUNCEMENT

i In March 2022, the Financial Accounting Standards Board issued Accounting Standards Update No. 2022-02, Troubled Debt Restructurings and Vintage Disclosures. The standard modifies the accounting for troubled debt restructurings by creditors and modifies certain disclosure requirements. The guidance will be applied prospectively, with the exception of the recognition and measurement of troubled debt restructurings, for which we may elect to apply a modified retrospective transition method. The standard is effective for us on January 1, 2023, and we do not expect its adoption to have a significant impact on our financial position or results of operations.


NOTE 3: SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

i i

Trade accounts receivable – Net trade accounts receivable were comprised of the following:

(in thousands)

Trade accounts receivable – gross

i 188,534

i 202,077

Allowance for credit losses

( i 4,199)

( i 4,130)

Trade accounts receivable – net(1)

i 184,335

i 197,947

(1) Includes unbilled receivables of $ i 50,106 as of March 31, 2022 and $ i 47,420 as of December 31, 2021.

/ /


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

Changes in the allowance for credit losses for the quarters ended March 31, 2022 and 2021 were as follows:

Quarter Ended
March 31,

(in thousands)

2022

2021

Balance, beginning of year

i 4,130

i 6,428

Bad debt expense (benefit)

i 625

( i 649)

Write-offs and other

( i 556)

( i 900)

Balance, end of period

i 4,199

i 4,879

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

(in thousands)

Raw materials

i 5,587

i 5,316

Semi-finished goods

i 6,742

i 6,708

Finished goods

i 21,555

i 21,995

Supplies

i 6,022

i 6,041

Reserves for excess and obsolete items

( i 5,379)

( i 5,132)

Inventories and supplies, net of reserves

i 34,527

i 34,928

Changes in the reserves for excess and obsolete items were as follows for the quarters ended March 31, 2022 and 2021:

Quarter Ended
March 31,

(in thousands)

2022

2021

Balance, beginning of year

i 5,132

i 11,748

Amounts charged to expense

i 773

i 2,013

Write-offs and other

( i 526)

( i 822)

Balance, end of period

i 5,379

i 12,939

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

(in thousands)

Cost

Gross unrealized gains

Gross unrealized losses

Fair value

Funds held for customers:(1)

Canadian and provincial government securities

i 9,865

i —

( i 836)

i 9,029

Canadian guaranteed investment certificate

i 3,998

i —

i 3,998

Available-for-sale debt securities

i i 13,863 /

i i — /

( i i 836 / )

i i 13,027 /

(1) Funds held for customers, as reported on the consolidated balance sheet as of March 31, 2022, also included cash of $ i 143,725.


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

(in thousands)

Cost

Gross unrealized gains

Gross unrealized losses

Fair value

Funds held for customers:(1)

Canadian and provincial government securities

i 9,724

i —

( i 374)

i 9,350

Canadian guaranteed investment certificate

i 3,957

i —

i 3,957

Available-for-sale debt securities

i i 13,681 /

i i — /

( i i 374 / )

i i 13,307 /

(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2021, also included cash of $ i 241,488.

Expected maturities of available-for-sale debt securities as of March 31, 2022 were as follows:


(in thousands)	Fair value
Due in one year or less	$	i 6,572
Due in two to five years	i 2,708
Due in six to ten years	i 3,747
Available-for-sale debt securities	$	i 13,027

Further information regarding the fair value of available-for-sale debt securities can be found in Note 8.

Revenue in excess of billings – Revenue in excess of billings was comprised of the following:

(in thousands)

Conditional right to receive consideration

i 22,657

i 22,780

Unconditional right to receive consideration(1)

i 11,032

i 7,613

Revenue in excess of billings

i 33,689

i 30,393

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

Intangibles – Intangibles were comprised of the following:

(in thousands)

Gross carrying amount

Accumulated amortization

Net carrying amount

Gross carrying amount

Accumulated amortization

Net carrying amount

Customer lists/relationships

i 493,510

( i 264,822)

i 228,688

i 493,495

( i 255,178)

i 238,317

Internal-use software

i 471,035

( i 354,338)

i 116,697

i 456,133

( i 342,656)

i 113,477

Technology-based intangibles

i 98,813

( i 40,584)

i 58,229

i 98,813

( i 38,553)

i 60,260

Partner relationships

i 73,257

( i 4,323)

i 68,934

i 73,095

( i 2,990)

i 70,105

Trade names

i 44,185

( i 24,935)

i 19,250

i 51,052

( i 31,277)

i 19,775

Software to be sold

i 36,900

( i 29,167)

i 7,733

i 36,900

( i 28,110)

i 8,790

Intangibles

i 1,217,700

( i 718,169)

i 499,531

i 1,209,488

( i 698,764)

i 510,724


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

Amortization of intangibles was $ i 36,159 for the quarter ended March 31, 2022 and $ i 23,264 for the quarter ended March 31, 2021. i Based on the intangibles in service as of March 31, 2022, estimated future amortization expense is as follows:


(in thousands)	Estimated amortization expense
Remainder of 2022	$	i 88,406
2023	i 117,562
2024	i 75,257
2025	i 50,306
2026	i 40,004

i The following intangibles were acquired during the quarter ended March 31, 2022:

(in thousands)

Amount

Weighted-average amortization period
(in years)

Internal-use software

i 15,931

i 3

Customer lists/relationships

i 10,280

i 6

Partner relationships

i 163

i 1

Acquired intangibles

i 26,374

i 4

Goodwill – Changes in goodwill by reportable segment and in total were as follows for the quarter ended March 31, 2022:

(in thousands)

Payments

Cloud Solutions

Promotional Solutions

Checks

Total

Balance, December 31, 2021:

Goodwill, gross

i 895,338

i 432,984

i 252,874

i 434,812

i 2,016,008

Accumulated impairment charges

i —

( i 392,168)

( i 193,699)

i —

( i 585,867)

Goodwill, net of accumulated impairment charges

i 895,338

i 40,816

i 59,175

i 434,812

i 1,430,141

Currency translation adjustment

—

i 15

—

i 15

Balance, March 31, 2022

i 895,338

i 40,816

i 59,190

i 434,812

i 1,430,156

Balance, March 31, 2022:

Goodwill, gross

i 895,338

i 432,984

i 252,889

i 434,812

i 2,016,023

Accumulated impairment charges

i —

( i 392,168)

( i 193,699)

i —

( i 585,867)

Goodwill, net of accumulated impairment charges

i 895,338

i 40,816

i 59,190

i 434,812

i 1,430,156


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)

Postretirement benefit plan asset

i 88,943

i 87,019

Cloud computing arrangements implementation costs

i 66,408

i 63,806

Prepaid product discounts

i 51,885

i 56,527

Deferred contract acquisition costs(1)

i 20,200

i 17,975

Loans and notes receivable from distributors, net of allowance for credit losses(2)

i 15,970

i 20,201

Assets held for sale(3)

i 10,151

i 7,251

Other

i 25,899

i 26,684

Other non-current assets

i 279,456

i 279,463

(1) Amortization of deferred contract acquisition costs was $ i 1,756 for the quarter ended March 31, 2022 and $ i 972 for the quarter ended March 31, 2021.

(2) Amount includes the non-current portion of loans and notes receivable. The current portion of these receivables is included in other current assets on the consolidated balance sheets and was $ i 1,162 as of March 31, 2022 and $ i 1,317 as of December 31, 2021.

(3) Relates primarily to the continuing evaluation of our real estate footprint in both periods, as well as the assets of our Australian web hosting business as of March 31, 2022 (Note 6).

Changes in the allowance for credit losses related to loans and notes receivable from distributors were as follows for the quarters ended March 31, 2022 and 2021:

Quarter Ended
March 31,

(in thousands)

2022

2021

Balance, beginning of year

i 2,830

i 3,995

Bad debt expense (benefit)

i 81

( i 634)

Exchange for customer lists

( i 402)

i —

Balance, end of period

i 2,509

i 3,361

Past due receivables and those on non-accrual status were not significant as of March 31, 2022 or December 31, 2021.

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 distributors, including the current portion, by credit quality indicator and by year of origination, as of March 31, 2022. There were i i i no / / write-offs or recoveries recorded during the quarter ended March 31, 2022.

Loans and notes receivable from distributors amortized cost basis by origination year

(in thousands)

2020

2019

2018

2017

Prior

Total

Risk rating:

1-2 internal grade

i 1,201

i 471

i 5,283

i 8,942

i 1,145

i 17,042

3-4 internal grade

i —

i 2,599

i —

i 2,599

Loans and notes receivable

i 1,201

i 3,070

i 5,283

i 8,942

i 1,145

i 19,641

Changes in prepaid product discounts during the quarters ended March 31, 2022 and 2021 were as follows:

Quarter Ended
March 31,

(in thousands)

2022

2021

Balance, beginning of year

i 56,527

i 50,602

Additions(1)

i 4,229

i 7,890

Amortization

( i 8,924)

( i 7,440)

Other

i 53

( i 8)

Balance, end of period

i 51,885

i 51,044

(1) Prepaid product discounts are generally accrued upon contract execution. Cash payments for prepaid product discounts were $ i 7,859 for the quarter ended March 31, 2022 and $ i 9,590 for the quarter ended March 31, 2021.

Accrued liabilities – Accrued liabilities were comprised of the following:

(in thousands)

Deferred revenue(1)

i 46,908

i 52,645

Employee cash bonuses, including sales incentives

i 16,216

i 45,006

Interest

i 15,451

i 4,597

Operating lease liabilities

i 14,243

i 14,852

Customer rebates

i 9,316

i 9,036

Prepaid product discounts due within one year

i 8,319

i 11,866

Other

i 91,460

i 78,830

Accrued liabilities

i 201,913

i 216,832

(1) $ i 20,238 of the December 31, 2021 amount was recognized as revenue during the quarter ended March 31, 2022.

Supplemental cash flow information – The reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents to the consolidated balance sheets was as follows:

(in thousands)

March 31,
2021

Cash and cash equivalents

i 44,059

i 125,440

Restricted cash and restricted cash equivalents included in funds held for customers

i 143,725

i 109,075

Cash and cash equivalents included in other current assets(1)

i 400

i —

Non-current restricted cash included in other non-current assets

i 2,595

i —

Total cash, cash equivalents, restricted cash and restricted cash equivalents

i 190,779

i 234,515

(1) Represents cash and cash equivalents of our Australian web hosting business that was classified as held for sale as of March 31, 2022 (Note 6).


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


NOTE 4: EARNINGS PER SHARE

i i

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

Quarter Ended
March 31,

(in thousands, except per share amounts)

2022

2021

Earnings per share – basic:

Net income

i 9,680

i 24,325

Net income attributable to non-controlling interest

( i 36)

( i 33)

Net income attributable to Deluxe

i 9,644

i 24,292

Income allocated to participating securities

( i 10)

( i 19)

Income attributable to Deluxe available to common shareholders

i 9,634

i 24,273

Weighted-average shares outstanding

i 42,803

i 42,046

Earnings per share – basic

i 0.23

i 0.58

Earnings per share – diluted:

Net income

i 9,680

i 24,325

Net income attributable to non-controlling interest

( i 36)

( i 33)

Net income attributable to Deluxe

i 9,644

i 24,292

Income allocated to participating securities

( i 10)

i —

Re-measurement of share-based awards classified as liabilities

( i 39)

i —

Income attributable to Deluxe available to common shareholders

i 9,595

i 24,292

Weighted-average shares outstanding

i 42,803

i 42,046

Dilutive impact of potential common shares

i 429

i 458

Weighted-average shares and potential common shares outstanding

i 43,232

i 42,504

Earnings per share – diluted

i 0.22

i 0.57

Antidilutive options excluded from calculation

i 2,063

i 2,423

/ /


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


NOTE 5: OTHER COMPREHENSIVE INCOME

i i

Reclassification adjustments – Information regarding amounts reclassified from accumulated other comprehensive loss to net income was as follows:

Accumulated other comprehensive loss components

Amounts reclassified from accumulated other comprehensive loss

Affected line item in consolidated statements of comprehensive income

Quarter Ended
March 31,

(in thousands)

2022

2021

Realized loss on interest rate swap

( i 318)

( i 334)

Interest expense

Tax benefit

i 83

i 87

Income tax provision

Realized loss on interest rate swap, net of tax

( i 235)

( i 247)

Net income

Amortization of postretirement benefit plan items:

Prior service credit

i 355

Other income

Net actuarial loss

( i 225)

( i 407)

Other income

Total amortization

i 130

( i 52)

Other income

Tax expense

( i 77)

( i 31)

Income tax provision

Amortization of postretirement benefit plan items, net of tax

i 53

( i 83)

Net income

Total reclassifications, net of tax

( i 182)

( i 330)

Accumulated other comprehensive loss – Changes in the components of accumulated other comprehensive loss during the quarter ended March 31, 2022 were as follows:

(in thousands)

Postretirement benefit plans

Net unrealized loss on available-for-sale debt securities(1)

Net unrealized loss on cash flow hedge(2)

Currency translation adjustment

Accumulated other comprehensive loss

Balance, December 31, 2021

( i 15,431)

( i 344)

( i 2,261)

( i 13,456)

( i 31,492)

Other comprehensive (loss) income before reclassifications

i —

( i 335)

i 1,924

i 696

i 2,285

Amounts reclassified from accumulated other comprehensive loss

( i 53)

i —

i 235

i —

i 182

Net current-period other comprehensive (loss) income

( i 53)

( i 335)

i 2,159

i 696

i 2,467

Balance, March 31, 2022

( i 15,484)

( i 679)

( i 102)

( i 12,760)

( i 29,025)

(1) Other comprehensive loss before reclassifications is net of an income tax benefit of $ i 116.

(2) Other comprehensive income before reclassifications is net of income tax expense of $ i 679.

/ /


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


NOTE 6: ACQUISITION AND DIVESTITURE

Acquisition – On June 1, 2021, we acquired all of the equity of First American Payment Systems, L.P. (First American). Further information regarding this acquisition, including the preliminary allocation of the purchase price, can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in the 2021 Form 10-K. We expect to finalize the purchase price allocation in the second quarter of 2022, when we complete the tax returns for the pre-acquisition period.

Our results of operations for the quarter ended March 31, 2022 included revenue of $ i 83,284 and net loss of $ i 510 from the operations of First American, including restructuring and integration costs of $ i 2,222 related primarily to real estate rationalization. Our results of operations for the quarter ended March 31, 2021 included related acquisition transaction costs of $ i 2,765, which are included in selling, general and administrative expense in the consolidated statement of comprehensive income.

Revised pro forma financial information – During the first quarter of 2022, we identified errors in the previously reported pro forma results of operations related to the First American acquisition. These errors related to the amount of historical First American revenue and net income (loss) included for the pre-acquisition periods, as well as errors in the adjustments related to the amortization of acquired intangibles, interest expense on the acquisition financing and transaction costs.

For the quarter and six months ended June 30, 2021 and the nine months ended September 30, 2021, these corrections decreased pro forma revenue by $ i i i 27,595 / / from the amounts previously reported. For the years ended December 31, 2021 and 2020, these corrections decreased pro forma revenue by $ i 26,335 and $ i 3,027, respectively, from the amounts previously reported. i The corrections adjusted pro forma net income (loss) attributable to Deluxe as follows from the amounts previously reported:


(in thousands)	Increase in pro forma net income (loss) attributable to Deluxe
Quarter ended June 30, 2021	$	i 7,636
Six Months ended June 30, 2021	i 5,911
Quarter ended September 30, 2021	i 2,231
Nine Months ended September 30, 2021	i 8,142
Year Ended December 31, 2021	i 10,138
Year Ended December 31, 2020	( i 9,082)

The following unaudited pro forma financial information summarizes our consolidated results of operations as though the acquisition occurred on January 1, 2020:

As Revised

(in thousands)

Quarter Ended
March 31, 2021

Quarter Ended
June 30, 2021

Six Months Ended
June 30, 2021

Quarter Ended

Sept. 30, 2021(1)

Nine Months Ended
Sept. 30, 2021

Year Ended December 31, 2021

Year Ended December 31, 2020

Revenue

i 518,104

i 535,493

i 1,053,597

i 532,141

i 1,585,738

i 2,156,313

i 2,079,103

Net income (loss) attributable to Deluxe

i 19,044

i 24,579

i 43,623

i 14,695

i 58,318

i 74,843

( i 54,489)

(1) Only net income attributable to Deluxe was revised for the quarter ended September 30, 2021.

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 2021 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. The pro forma information also includes adjustments to reflect the additional interest expense on the debt we issued to fund the acquisition, and the acquisition transaction costs we incurred during 2021 are reflected in the 2020 pro forma results.


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

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.

Divestiture – In May 2022, we completed the sale of our Australian web hosting business for cash proceeds of $ i 20,000. We determined that the sale of this business would give us more flexibility to further refine our offerings in the North American market, allowing us to better manage our portfolio of businesses and to maximize our cross-sell capabilities. This business generated annual revenue in our Cloud Solutions segment of $ i 23,766 for 2021. We anticipate that we will recognize a gain on the sale of this business in the second quarter of 2022. The assets and liabilities of the business were classified as held for sale in the consolidated balance sheet as of March 31, 2022 within other current assets, other non-current assets and accrued liabilities. The amounts of these assets and liabilities were not significant to our consolidated balance sheet.


NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

i As part of our interest rate risk management strategy, 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 our variable-rate debt (Note 12). The interest rate swap, which terminates in March 2023, effectively converts $ i 200,000 of variable rate debt to a fixed rate of i 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 $ i 107 as of March 31, 2022 and was included in accrued liabilities on the consolidated balance sheet. The fair value of the swap was $ i 3,028 as of December 31, 2021 and was included in other non-current liabilities on the consolidated balance sheet. 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 March 31, 2022 and December 31, 2021, and its impact on consolidated net income 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 8: FAIR VALUE MEASUREMENTS

i 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 an investment in a Canadian guaranteed investment certificate (GIC) with a maturity of i 2 years. 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. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss on the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue on the consolidated statements of comprehensive income and were not significant during the quarters ended March 31, 2022 and 2021. /


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

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

Fair value measurements using

Quoted prices in active markets for identical assets
(Level 1)

Significant other observable inputs
(Level 2)

Significant unobservable inputs
(Level 3)

(in thousands)

Balance sheet location

Carrying value

Fair value

Measured at fair value through comprehensive income:

Available-for-sale debt securities

Funds held for customers

i 13,027

—

i 13,027

—

Derivative liability (Note 7)

Accrued liabilities

( i 107)

—

( i 107)

—

Amortized cost:

Cash

Cash and cash equivalents

i 44,059

—

Cash

Funds held for customers

i 143,725

—

Cash

Other current assets

i 400

—

Cash

Other non-current assets

i 2,595

—

Loans and notes receivable from distributors

Other current and non-current assets

i 17,132

i 16,973

—

i 16,973

Long-term debt

Current portion of long-term debt and long-term debt

i 1,692,418

i 1,719,732

—

i 1,719,732

—


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

Fair value measurements using

Quoted prices in active markets for identical assets
(Level 1)

Significant other observable inputs
(Level 2)

Significant unobservable inputs
(Level 3)

(in thousands)

Balance sheet location

Carrying value

Fair value

Measured at fair value through comprehensive income:

Available-for-sale debt securities

Funds held for customers

i 13,307

—

i 13,307

—

Derivative liability (Note 7)

Other non-current liabilities

( i 3,028)

—

( i 3,028)

—

Amortized cost:

Cash

Cash and cash equivalents

i 41,231

—

Cash

Funds held for customers

i 241,488

—

Cash

Other non-current assets

i 2,772

—

Loans and notes receivable from distributors

Other current and non-current assets

i 21,518

i 22,344

—

i 22,344

Long-term debt

Current portion of long-term debt and long-term debt

i 1,682,949

i 1,728,515

—

i 1,728,515

—


NOTE 9: RESTRUCTURING AND INTEGRATION EXPENSE

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

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

Quarter Ended
March 31,

(in thousands)

2022

2021

Total cost of revenue

i 59

i 899

Operating expenses

i 16,244

i 14,313

Restructuring and integration expense

i 16,303

i 15,212

/ /


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
March 31,

(in thousands)

2022

2021

External consulting fees

i 7,859

i 7,383

Internal labor

i 1,696

i 2,041

Employee severance benefits

i 1,125

i 857

Other

i 5,623

i 4,931

Restructuring and integration expense

i 16,303

i 15,212

Our restructuring and integration accruals are included in accrued liabilities on the consolidated balance sheets and represent expected cash payments required to satisfy the remaining severance obligations to those employees already terminated and those expected to be terminated under our various initiatives. The majority of the employee reductions and the related severance payments are expected to be completed by mid-2022.

Changes in our restructuring and integration accruals were as follows:


(in thousands)	Employee severance benefits
Balance, December 31, 2021	$	i 5,672
Charges	i 1,629
Reversals	( i 504)
Payments	( i 3,759)
Balance, March 31, 2022	$	i 3,038

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 10: INCOME TAX PROVISION

i i

The effective tax rate on pretax income reconciles to the U.S. federal statutory tax rate as follows:

Quarter Ended March 31, 2022

Year Ended December 31, 2021

Income tax at federal statutory rate

i 21.0

Change in valuation allowance

i 100.4

i 0.1

Tax impact of share-based compensation

i 11.7

i 0.9

State income tax expense, net of federal income tax benefit

i 2.5

i 2.4

Non-deductible executive compensation

i 2.5

i 1.7

Foreign tax rate differences

i 1.7

Tax on repatriation of foreign earnings

i 1.4

i 4.9

Non-deductible acquisition costs

i 0.1

i 1.5

Basis difference in Australian web hosting business

( i 117.6

i —

Research and development tax credit

( i 1.1

( i 0.9

Other

i 0.3

( i 0.2

Effective tax rate

i 22.9

i 33.1

During the quarter ended March 31, 2022, we executed an agreement for the sale of our Australian web hosting business, and we completed the sale in May 2022. The assets and liabilities of this business were classified as held for sale in the consolidated balance sheet as of March 31, 2022, and we recognized a deferred tax asset of $ i 14,764 for the difference between the book and tax basis of our investment in this business. We also recorded a valuation allowance of $ i 12,601 against this deferred tax asset for the portion that we do not currently expect to realize.


NOTE 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 13: Postretirement Benefits” in the Notes to Consolidated Financial Statements appearing in the 2021 Form 10-K.

Postretirement benefit income is included in other income on the consolidated statements of comprehensive income and consisted of the following components:

Quarter Ended
March 31,

(in thousands)

2022

2021

Interest cost

i 280

i 242

Expected return on plan assets

( i 1,866)

( i 1,875)

Amortization of prior service credit

( i 355)

Amortization of net actuarial losses

i 225

i 407

Net periodic benefit income

( i 1,716)

( i 1,581)

/ /


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


NOTE 12: DEBT

i i

Debt outstanding was comprised of the following:

(in thousands)

Senior, secured term loan facility

i 1,057,687

i 1,072,125

Senior, unsecured notes

i 500,000

Amounts drawn on senior, secured revolving credit facility

i 153,000

i 130,000

Total principal amount

i 1,710,687

i 1,702,125

Less: unamortized discount and debt issuance costs

( i 18,269)

( i 19,176)

Total debt, net of discount and debt issuance costs

i 1,692,418

i 1,682,949

Less: current portion of long-term debt, net of debt issuance costs

( i 57,227)

( i 57,197)

Long-term debt

i 1,635,191

i 1,625,752

Maturities of long-term debt were as follows as of March 31, 2022:


(in thousands)	Debt obligations
Remainder of 2022	$	i 43,312
2023	i 72,188
2024	i 86,625
2025	i 101,062
2026	i 907,500
Thereafter	i 500,000
Total principal amount	$	i 1,710,687

Credit facility – In June 2021, we executed a senior, secured credit facility consisting of a revolving credit facility with commitments of $ i 500,000 and a $ i 1,155,000 term loan facility. The revolving credit facility includes a $ i 40,000 swingline sub-facility and a $ i 25,000 letter of credit sub-facility. Proceeds from the credit facility were used to terminate our previous credit facility agreement and to fund the acquisition of First American (Note 6). Loans under the revolving credit facility 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 $ i i i i i 14,438 / / / / through June 30, 2023, $ i i i i i i i i 21,656 / / / / / / / from September 30, 2023 through June 30, 2025, and $ i i i 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 mandatory prepayment requirements related to asset sales, new debt (other than permitted debt) and excess cash flow, subject to certain limitations. No premium or penalty is payable in connection with any mandatory or voluntary prepayment of the term loan facility.

Interest is payable under the credit facility at a fluctuating rate of interest determined by reference to the eurodollar rate plus an applicable margin ranging from i 1.5% to i 2.5%, depending on our consolidated total leverage ratio, as defined in the credit agreement. A commitment fee is payable on the unused portion of the revolving credit facility at a rate ranging from i 0.25% to i 0.35%, depending on our consolidated total leverage ratio. Amounts outstanding under the credit facility had a weighted-average interest rate of i 2.99% as of March 31, 2022 and i 2.67% as of December 31, 2021, including the impact of an interest rate swap that effectively converts $ i 200,000 of our variable-rate debt to fixed rate debt. Further information regarding the interest rate swap can be found in Note 7.

Borrowings under the credit facility are collateralized by substantially all of the present and future tangible and intangible personal property held by us and our subsidiaries that have guaranteed our obligations under the credit facility, subject to certain exceptions. The credit agreement contains customary covenants regarding limits on levels of indebtedness, liens, mergers, certain asset dispositions, changes in business, advances, investments, loans and restricted payments. The covenants are subject to a number of limitations and exceptions set forth in the credit agreement. i The credit agreement also includes


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

requirements regarding our consolidated total leverage ratio and our consolidated secured leverage ratio, as defined in the credit 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