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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
[X]
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended
September 30, 2017
[ ]
 
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

deluxeenterpriselogoa02.jpg 

DELUXE CORPORATION
(Exact name of registrant as specified in its charter) 
Minnesota
(State or other jurisdiction of incorporation or organization)
41-0216800
(I.R.S. Employer Identification No.)
3680 Victoria St. N., Shoreview, Minnesota
(Address of principal executive offices)
55126-2966
(Zip Code)

(651) 483-7111
(Registrant’s telephone number, including area code) 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes   [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
[X] Yes   [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
 
Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes   [X] No

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

1

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value)
(Unaudited)
 
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
53,410

 
$
76,574

Trade accounts receivable (net of allowances for uncollectible accounts of $2,808 and $2,828, respectively)
 
136,262

 
152,649

Inventories and supplies
 
40,929

 
40,182

Funds held for customers
 
78,447

 
87,823

Other current assets
 
63,471

 
41,002

Total current assets
 
372,519

 
398,230

Deferred income taxes
 
2,839

 
1,605

Long-term investments (including $1,729 and $1,877 of investments at fair value, respectively)
 
42,178

 
42,240

Property, plant and equipment (net of accumulated depreciation of $355,254 and $349,249, respectively)
 
83,253

 
86,896

Assets held for sale
 
8,689

 
14,568

Intangibles (net of accumulated amortization of $481,667 and $435,756, respectively)
 
392,523

 
409,781

Goodwill
 
1,126,086

 
1,105,956

Other non-current assets
 
151,893

 
125,062

Total assets
 
$
2,179,980

 
$
2,184,338

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
103,577

 
$
106,793

Accrued liabilities
 
255,542

 
273,049

Long-term debt due within one year
 
41,966

 
35,842

Total current liabilities
 
401,085

 
415,684

Long-term debt
 
714,432

 
722,806

Deferred income taxes
 
65,226

 
85,172

Other non-current liabilities
 
48,692

 
79,706

Commitments and contingencies (Notes 11 and 12)
 


 


Shareholders' equity:
 
 

 
 

Common shares $1 par value (authorized: 500,000 shares; outstanding: September 30, 2017 – 48,120; December 31, 2016 – 48,546)
 
48,120

 
48,546

Retained earnings
 
947,261

 
882,795

Accumulated other comprehensive loss
 
(44,836
)
 
(50,371
)
Total shareholders’ equity
 
950,545

 
880,970

Total liabilities and shareholders’ equity
 
$
2,179,980

 
$
2,184,338


See Condensed Notes to Unaudited Consolidated Financial Statements

2

DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(Unaudited)

 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Product revenue
 
$
361,963

 
$
364,680

 
$
1,097,777

 
$
1,090,686

Service revenue
 
135,706

 
94,240

 
372,889

 
278,174

Total revenue
 
497,669

 
458,920

 
1,470,666

 
1,368,860

Cost of products
 
(129,055
)
 
(133,628
)
 
(392,040
)
 
(391,161
)
Cost of services
 
(63,862
)
 
(32,642
)
 
(159,250
)
 
(99,246
)
Total cost of revenue
 
(192,917
)
 
(166,270
)
 
(551,290
)
 
(490,407
)
Gross profit
 
304,752

 
292,650

 
919,376

 
878,453

Selling, general and administrative expense
 
(202,999
)
 
(198,365
)
 
(628,100
)
 
(598,563
)
Net restructuring charges
 
(1,267
)
 
(1,993
)
 
(3,708
)
 
(4,007
)
Asset impairment charges
 
(46,630
)
 
—

 
(54,880
)
 
—

Operating income
 
53,856


92,292

 
232,688

 
275,883

Interest expense
 
(5,708
)
 
(4,855
)
 
(15,795
)
 
(15,281
)
Other income
 
799

 
742

 
2,104

 
1,335

Income before income taxes
 
48,947

 
88,179

 
218,997

 
261,937

Income tax provision
 
(20,146
)
 
(29,516
)
 
(73,551
)
 
(86,783
)
Net income
 
$
28,801

 
$
58,663

 
$
145,446

 
$
175,154

Comprehensive income
 
$
31,543

 
$
57,824

 
$
150,981

 
$
180,298

Basic earnings per share
 
0.60

 
1.20

 
3.00

 
3.57

Diluted earnings per share
 
0.59

 
1.19

 
2.98

 
3.55

Cash dividends per share
 
0.30

 
0.30

 
0.90

 
0.90


See Condensed Notes to Unaudited Consolidated Financial Statements


3

DELUXE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)

 
 
Common shares
 
Common shares
par value
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Balance, December 31, 2016
 
48,546

 
$
48,546

 
$
—

 
$
882,795

 
$
(50,371
)
 
$
880,970

Net income
 
—

 
—

 
—

 
145,446

 
—

 
145,446

Cash dividends
 
—

 
—

 
—

 
(43,672
)
 
—

 
(43,672
)
Common shares issued
 
435

 
435

 
12,906

 
—

 
—

 
13,341

Common shares repurchased
 
(709
)
 
(709
)
 
(12,053
)
 
(37,308
)
 
—

 
(50,070
)
Other common shares retired
 
(152
)
 
(152
)
 
(11,148
)
 
—

 
—

 
(11,300
)
Fair value of share-based compensation
 
—

 
—

 
10,295

 
—

 
—

 
10,295

Other comprehensive income
 
—

 
—

 
—

 
—

 
5,535

 
5,535

Balance, September 30, 2017
 
48,120

 
$
48,120

 
$
—

 
$
947,261

 
$
(44,836
)
 
$
950,545



See Condensed Notes to Unaudited Consolidated Financial Statements


4

DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
145,446

 
$
175,154

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

 
 

Depreciation
 
12,013

 
11,347

Amortization of intangibles
 
79,284

 
56,364

Asset impairment charges
 
54,880

 
—

Amortization of contract acquisition costs
 
14,685

 
14,700

Deferred income taxes
 
(20,587
)
 
(1,477
)
Employee share-based compensation expense
 
11,149

 
9,264

Other non-cash items, net
 
(2,492
)
 
3,128

Changes in assets and liabilities, net of effect of acquisitions:
 
 

 
 

Trade accounts receivable
 
19,140

 
5,320

Inventories and supplies
 
800

 
176

Other current assets
 
(16,692
)
 
(2,379
)
Non-current assets
 
(3,748
)
 
(3,351
)
Accounts payable
 
(6,750
)
 
(1,619
)
Contract acquisition payments
 
(20,003
)
 
(17,190
)
Other accrued and non-current liabilities
 
(41,229
)
 
(41,316
)
Net cash provided by operating activities
 
225,896

 
208,121

Cash flows from investing activities:
 
 

 
 

Purchases of capital assets
 
(34,351
)
 
(32,215
)
Payments for acquisitions, net of cash acquired
 
(125,417
)
 
(64,637
)
Proceeds from sales of marketable securities
 
3,500

 
1,635

Proceeds from company-owned life insurance policies
 
1,293

 
4,123

Other
 
873

 
695

Net cash used by investing activities
 
(154,102
)
 
(90,399
)
Cash flows from financing activities:
 
 

 
 

Proceeds from issuing long-term debt
 
333,000

 
169,000

Payments on long-term debt
 
(336,590
)
 
(185,873
)
Proceeds from issuing shares under employee plans
 
8,218

 
6,861

Employee taxes paid for shares withheld
 
(6,816
)
 
(2,333
)
Payments for common shares repurchased
 
(50,070
)
 
(44,944
)
Cash dividends paid to shareholders
 
(43,672
)
 
(44,127
)
Other
 
(1,281
)
 
(1,634
)
Net cash used by financing activities
 
(97,211
)
 
(103,050
)
Effect of exchange rate change on cash
 
2,253

 
2,966

Net change in cash and cash equivalents
 
(23,164
)
 
17,638

Cash and cash equivalents, beginning of year
 
76,574

 
62,427

Cash and cash equivalents, end of period
 
$
53,410

 
$
80,065


See Condensed Notes to Unaudited Consolidated Financial Statements

5
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, 2017, the consolidated statements of comprehensive income for the quarters and nine months ended September 30, 2017 and 2016, the consolidated statement of shareholders’ equity for the nine months ended September 30, 2017, and the consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 are unaudited. The consolidated balance sheet as of December 31, 2016 was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles (GAAP) in the United States of America. In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial statements are included. Adjustments consist only of normal recurring items, except for any discussed in the notes below. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented in accordance with instructions for Form 10-Q and do not contain certain information included in our annual consolidated financial statements and notes. The consolidated financial statements and notes appearing in this report should be read in conjunction with the consolidated audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”).

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


Note 2: New accounting pronouncements

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

Accounting pronouncements not yet adopted – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard provides revenue recognition guidance for any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other accounting standards. The standard also expands the required financial statement disclosures regarding revenue recognition. In addition, in March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), in April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, and in May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients. These standards are intended to clarify aspects of ASU No. 2014-09 and are effective for us upon adoption of ASU No. 2014-09. The new guidance is effective for us on January 1, 2018. We are currently in the process of analyzing each of our revenue streams in accordance with the new guidance. We have completed the evaluation of our checks, forms and accessories revenue streams and we do not expect the application of these standards to those revenue streams to have a material impact on our results of operations or financial position. We continue to make progress in the evaluation of our various marketing solutions and other services revenue streams. We currently anticipate that we will adopt the standards using the modified retrospective method. This method requires the standard to be applied to existing and future contracts as of the effective date, with an adjustment to opening retained earnings in the year of adoption for the cumulative effect of the change. In addition, we will disclose the amount by which each financial statement line item is affected in the current reporting period by the application of the new guidance as compared with the guidance that was in effect before the change.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The standard is intended to improve the recognition, measurement, presentation and disclosure of financial instruments. The guidance is effective for us on January 1, 2018. We do not expect the application of this standard to have a significant impact on our results of operations or financial position.

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

6
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

requiring the disclosure of key information about leasing arrangements. The guidance is effective for us on January 1, 2019 and requires adoption using a modified retrospective approach. We are currently assessing the impact of this standard on our consolidated financial statements.
 
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The standard introduces new guidance for the accounting for credit losses on instruments within its scope, including trade and loans receivable and available-for-sale debt securities. The guidance is effective for us on January 1, 2020 and requires adoption using a modified retrospective approach. We do not expect the application of this standard to have a significant impact on our results of operations or financial position.

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

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The standard revises the
definition of a business, which affects many areas of accounting such as business combinations and disposals and goodwill impairment. The revised definition of a business will likely result in more acquisitions being accounted for as asset acquisitions, as opposed to business combinations. The guidance is effective for us on January 1, 2018 and is required to be applied prospectively to transactions occurring on or after the effective date.

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

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


Note 3: Supplemental balance sheet information

Inventories and supplies – Inventories and supplies were comprised of the following:
(in thousands)
 
September 30,
2017
 
December 31,
2016
Raw materials
 
$
7,702

 
$
5,861

Semi-finished goods
 
8,322

 
7,990

Finished goods
 
21,716

 
23,235

Supplies
 
3,189

 
3,096

Inventories and supplies
 
$
40,929

 
$
40,182



7
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Available-for-sale securities – Available-for-sale securities included within funds held for customers were comprised of the following:
 
 
September 30, 2017
(in thousands)
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Funds held for customers:(1)
 
 
 
 
 
 
 
 
Domestic money market fund
 
$
10,000

 
$
—

 
$
—

 
$
10,000

Canadian and provincial government securities
 
9,091

 
—

 
(424
)
 
8,667

Canadian guaranteed investment certificates
 
8,018

 
—

 
—

 
8,018

Available-for-sale securities
 
$
27,109

 
$
—

 
$
(424
)
 
$
26,685


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

 
 
December 31, 2016
(in thousands)
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Funds held for customers:(1)
 
 
 
 
 
 
 
 
Domestic money market fund
 
$
6,002

 
$
—

 
$
—

 
$
6,002

Canadian and provincial government securities
 
8,320

 
—

 
(228
)
 
8,092

Canadian guaranteed investment certificates
 
7,440

 
—

 
—

 
7,440

Available-for-sale securities
 
$
21,762

 
$
—

 
$
(228
)
 
$
21,534

 
(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2016, also included cash of $66,289.
 
Expected maturities of available-for-sale securities as of September 30, 2017 were as follows:
(in thousands)
 
Fair value
Due in one year or less
 
$
18,564

Due in two to five years
 
4,255

Due in six to ten years
 
3,866

Available-for-sale securities
 
$
26,685



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

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

8
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


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

We are actively marketing the remaining assets held for sale and we expect the selling prices will equal or exceed their current carrying values. Net assets held for sale consisted of the following:
(in thousands)
 
September 30,
2017
 
December 31,
2016
 
Balance sheet caption
Current assets
 
$
4

 
$
3

 
Other current assets
Intangibles
 
6,401

 
14,135

 
Assets held for sale
Goodwill
 
2,081

 
—

 
Assets held for sale
Other non-current assets
 
207

 
433

 
Assets held for sale
Accrued liabilities
 
(621
)
 
(146
)
 
Accrued liabilities
Deferred income tax liabilities
 
—

 
(5,697
)
 
Other non-current liabilities
Net assets held for sale
 
$
8,072

 
$
8,728

 
 


Intangibles – Intangibles were comprised of the following:
 
 
September 30, 2017
 
December 31, 2016
(in thousands)
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
Indefinite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
 
Trade name
 
$
19,100

 
$
—

 
$
19,100

 
$
19,100

 
$
—

 
$
19,100

Amortizable intangibles:
 
 

 
 

 
 

 
 

 
 

 
 

Internal-use software
 
407,844

 
(335,112
)
 
72,732

 
385,293

 
(310,195
)
 
75,098

Customer lists/relationships
 
337,985

 
(109,495
)
 
228,490

 
308,375

 
(76,276
)
 
232,099

Trade names(1)
 
38,761

 
(20,595
)
 
18,166

 
68,261

 
(40,857
)
 
27,404

Software to be sold
 
36,900

 
(10,147
)
 
26,753

 
34,700

 
(7,050
)
 
27,650

Technology-based intangibles
 
31,800

 
(4,783
)
 
27,017

 
28,000

 
—

 
28,000

Other
 
1,800

 
(1,535
)
 
265

 
1,808

 
(1,378
)
 
430

Amortizable intangibles
 
855,090

 
(481,667
)

373,423


826,437


(435,756
)

390,681

Intangibles
 
$
874,190

 
$
(481,667
)

$
392,523


$
845,537


$
(435,756
)

$
409,781



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

9
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Amortization of intangibles was $27,456 for the quarter ended September 30, 2017, $19,273 for the quarter ended September 30, 2016, $79,284 for the nine months ended September 30, 2017 and $56,364 for the nine months ended September 30, 2016. Based on the intangibles in service as of September 30, 2017, estimated future amortization expense is as follows:
(in thousands)
 
Estimated
amortization
expense
Remainder of 2017
 
$
28,333

2018
 
93,153

2019
 
72,877

2020
 
54,692

2021
 
44,412



During the nine months ended September 30, 2017, we acquired internal-use software in the normal course of business. We also acquired intangible assets in conjunction with acquisitions (Note 6). The following intangible assets were acquired during the nine months ended September 30, 2017:
(in thousands)
 
Amount
 
Weighted-average amortization period
(in years)
Internal-use software
 
$
27,065

 
3
Customer lists/relationships
 
50,184

 
8
Trade names
 
9,795

 
6
Software to be sold
 
2,200

 
5
Technology-based intangibles
 
800

 
3
Acquired intangibles
 
$
90,044

 
6


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

10
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)


Goodwill – Changes in goodwill during the nine months ended September 30, 2017 were as follows:
(in thousands)
 
Small
Business
Services
 
Financial
Services
 
Direct
Checks
 
Total
Balance, December 31, 2016:
 
 
 
 
 
 
 
 
Goodwill, gross
 
$
684,261

 
$
293,189

 
$
148,506

 
$
1,125,956

Accumulated impairment charges
 
(20,000
)
 
—

 
—

 
(20,000
)
Goodwill, net of accumulated impairment charges
 
664,261

 
293,189


148,506


1,105,956

Impairment charge (Note 7)
 
(28,379
)
 
—

 
—

 
(28,379
)
Goodwill resulting from acquisitions
 
22,966

 
30,583

 
—

 
53,549

Measurement-period adjustments for previous acquisitions (Note 6)
 
30

 
(2,160
)
 
—

 
(2,130
)
Sale of small business distributor
 
(1,000
)
 
—

 
—

 
(1,000
)
Reclassification to assets held for sale
 
(2,484
)
 
—

 
—

 
(2,484
)
Currency translation adjustment
 
574

 
—

 
—

 
574

Balance, September 30, 2017:
 
 

 
 

 
 

 
 

Goodwill, gross
 
704,347

 
321,612

 
148,506

 
1,174,465

Accumulated impairment charges
 
(48,379
)
 
—

 
—

 
(48,379
)
Goodwill, net of accumulated impairment charges
 
$
655,968

 
$
321,612


$
148,506


$
1,126,086

Other non-current assets – Other non-current assets were comprised of the following:
(in thousands)
 
September 30,
2017
 
December 31,
2016
Contract acquisition costs
 
$
66,631

 
$
65,792

Loans and notes receivable from Safeguard distributors
 
43,904

 
21,313

Postretirement benefit plan asset
 
28,840

 
23,940

Deferred advertising costs
 
5,987

 
7,309

Other
 
6,531

 
6,708

Other non-current assets
 
$
151,893

 
$
125,062



Changes in contract acquisition costs during the nine months ended September 30, 2017 and 2016 were as follows:
 
 
Nine Months Ended
September 30,
(in thousands)
 
2017
 
2016
Balance, beginning of year
 
$
65,792

 
$
58,792

Additions(1)
 
15,651

 
23,471

Amortization
 
(14,685
)
 
(14,700
)
Other
 
(127
)
 
(75
)
Balance, end of period
 
$
66,631

 
$
67,488

 
(1) Contract acquisition costs are accrued upon contract execution. Cash payments made for contract acquisition costs were $20,003 for the nine months ended September 30, 2017 and $17,190 for the nine months ended September 30, 2016.


11
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

Accrued liabilities – Accrued liabilities were comprised of the following:
(in thousands)
 
September 30,
2017
 
December 31,
2016
Funds held for customers
 
$
77,397

 
$
86,799

Deferred revenue
 
34,567

 
48,049

Employee profit sharing/cash bonus
 
25,560

 
27,760

Acquisition-related liabilities(1)
 
25,346

 
12,763

Customer rebates
 
14,256

 
16,281

Contract acquisition costs due within one year
 
13,508

 
12,426

Wages, including vacation
 
12,381

 
8,640

Income tax
 
6,890

 
19,708

Restructuring due within one year (Note 8)
 
1,549

 
4,181

Other
 
44,088

 
36,442

Accrued liabilities
 
$
255,542

 
$
273,049



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

Other non-current liabilities – Other non-current liabilities were comprised of the following:
(in thousands)
 
September 30,
2017
 
December 31,
2016
Contract acquisition costs
 
$
24,348

 
$
29,855

Acquisition-related liabilities(1)
 
2,415

 
19,390

Other
 
21,929

 
30,461

Other non-current liabilities
 
$
48,692

 
$
79,706


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



12
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

Note 4: Earnings per share

The following table reflects the calculation of basic and diluted earnings per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted earnings per share because their effect would have been antidilutive. 
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Earnings per share – basic:
 
 
 
 
 
 
 
 
Net income
 
$
28,801

 
$
58,663

 
$
145,446

 
$
175,154

Income allocated to participating securities
 
(176
)
 
(491
)
 
(961
)
 
(1,445
)
Income available to common shareholders
 
$
28,625

 
$
58,172


$
144,485

 
$
173,709

Weighted-average shares outstanding
 
48,081

 
48,493

 
48,217

 
48,634

Earnings per share – basic
 
$
0.60

 
$
1.20

 
$
3.00

 
$
3.57

 
 
 
 
 
 
 
 
 
Earnings per share – diluted:
 
 

 
 

 
 
 
 
Net income
 
$
28,801

 
$
58,663

 
$
145,446

 
$
175,154

Income allocated to participating securities
 
(175
)
 
(487
)
 
(956
)
 
(1,436
)
Re-measurement of share-based awards classified as liabilities
 
53

 
(64
)
 
7

 
230

Income available to common shareholders
 
$
28,679

 
$
58,112


$
144,497

 
$
173,948

Weighted-average shares outstanding
 
48,081

 
48,493

 
48,217

 
48,634

Dilutive impact of potential common shares
 
296

 
455

 
331

 
427

Weighted-average shares and potential common shares outstanding
 
48,377

 
48,948


48,548

 
49,061

Earnings per share – diluted
 
$
0.59

 
$
1.19

 
$
2.98

 
$
3.55

Antidilutive options excluded from calculation
 
266

 
223

 
266

 
223




Note 5: Other comprehensive income

Reclassification adjustments – Information regarding amounts reclassified from accumulated other comprehensive loss to net income was as follows:
Accumulated other comprehensive loss components
 
Amounts reclassified from accumulated other comprehensive loss
 
Affected line item in consolidated statements of comprehensive income
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
 
(in thousands)
 
2017
 
2016
 
2017
 
2016
 
 
Amortization of postretirement benefit plan items:
 
 
 
 
 
 
 
 
 
 
Prior service credit
 
$
355

 
$
355

 
1,066

 
1,066

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

 
181

 
497

 
544

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

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

13
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

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

Accumulated other comprehensive loss – Changes in the components of accumulated other comprehensive loss during the nine months ended September 30, 2017 were as follows:
(in thousands)
 
Postretirement benefit plans, net of tax
 
Net unrealized loss on marketable securities,
net of tax(1)
 
Currency translation adjustment
 
Accumulated other comprehensive loss
Balance, December 31, 2016