Edgar Filing: DELUXE CORP

Document

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, 2018
[ ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________________ to ________________________

Commission file number: 1-7945

DELUXE CORPORATION

(Exact name of registrant as specified in its charter)



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

(651) 483-7111

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

[X] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer [X]	Accelerated filer [ ]
Non-accelerated filer [ ]	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 17, 2018 was 46,306,669.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

DELUXE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share par value)

(Unaudited)



	September 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	57,851		$	59,240
Trade accounts receivable, net of allowances for uncollectible accounts	157,139			149,844
Inventories and supplies	45,118			42,249
Funds held for customers	84,407			86,192
Revenue in excess of billings	33,735			16,379
Other current assets	39,092			39,062
Total current assets	417,342			392,966
Deferred income taxes	1,606			1,428
Long-term investments	43,520			42,607
Property, plant and equipment (net of accumulated depreciation of $364,510 and $358,020, respectively)	83,507			84,638
Assets held for sale	3,250			12,232
Intangibles (net of accumulated amortization of $524,499 and $444,933, respectively)	396,641			384,266
Goodwill	1,125,954			1,130,934
Other non-current assets	195,547			159,756
Total assets	$	2,267,367		$	2,208,827

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	97,991		$	104,477
Accrued liabilities	234,529			277,253
Long-term debt due within one year	785			44,040
Total current liabilities	333,305			425,770
Long-term debt	890,098			665,260
Deferred income taxes	46,339			50,543
Other non-current liabilities	42,330			52,241
Commitments and contingencies (Notes 11 and 12)
Shareholders' equity:
Common shares $1 par value (authorized: 500,000 shares; outstanding: September 30, 2018 – 46,305; December 31, 2017 – 47,953)	46,305			47,953
Retained earnings	957,979			1,004,657
Accumulated other comprehensive loss	(48,989		)	(37,597		)
Total shareholders’ equity	955,295			1,015,013
Total liabilities and shareholders’ equity	$	2,267,367		$	2,208,827

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands, except per share amounts)

(Unaudited)



	Quarter Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Product revenue	$	352,767		$	361,963		$	1,076,110		$	1,097,777
Service revenue	140,423			135,706			397,239			372,889
Total revenue	493,190			497,669			1,473,349			1,470,666
Cost of products	(132,996		)	(129,192		)	(400,700		)	(392,451		)
Cost of services	(64,638		)	(63,879		)	(175,894		)	(159,301		)
Total cost of revenue	(197,634		)	(193,071		)	(576,594		)	(551,752		)
Gross profit	295,556			304,598			896,755			918,914
Selling, general and administrative expense	(208,533		)	(203,349		)	(629,272		)	(629,150		)
Net restructuring charges	(5,135		)	(1,267		)	(12,915		)	(3,708		)
Asset impairment charges	(99,170		)	(46,630		)	(101,319		)	(54,880		)
Operating (loss) income	(17,282		)	53,352			153,249			231,176
Interest expense	(7,244		)	(5,708		)	(18,953		)	(15,795		)
Other income	2,356			1,303			6,081			3,616
(Loss) income before income taxes	(22,170		)	48,947			140,377			218,997
Income tax provision	(8,913		)	(20,146		)	(47,916		)	(73,551		)
Net (loss) income	$	(31,083	)	$	28,801		$	92,461		$	145,446
Comprehensive (loss) income	$	(30,902	)	$	31,543		$	87,936		$	150,981
Basic (loss) earnings per share	(0.67		)	0.60			1.94			3.00
Diluted (loss) earnings per share	(0.67		)	0.59			1.93			2.98
Cash dividends per share	0.30			0.30			0.90			0.90

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(in thousands)

(Unaudited)



	Common shares		Common shares par value			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total
Balance, December 31, 2017	47,953		$	47,953		$	—		$	1,004,657		$	(37,597	)	$	1,015,013
Net income	—		—			—			92,461			—			92,461
Cash dividends	—		—			—			(43,012		)	—			(43,012		)
Common shares issued	518		518			18,181			—			—			18,699
Common shares repurchased	(1,919	)	(1,919		)	(10,121		)	(107,960		)	—			(120,000		)
Other common shares retired	(247	)	(247		)	(17,601		)	—			—			(17,848		)
Employee share-based compensation	—		—			9,541			—			—			9,541
Adoption of Accounting Standards Update No. 2014-09 (Note 2)	—		—			—			4,966			—			4,966
Adoption of Accounting Standards Update No. 2018-02 (Note 2)	—		—			—			6,867			(6,867		)	—
Other comprehensive loss	—		—			—			—			(4,525		)	(4,525		)
Balance, September 30, 2018	46,305		$	46,305		$	—		$	957,979		$	(48,989	)	$	955,295

See Condensed Notes to Unaudited Consolidated Financial Statements

DELUXE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net income	$	92,461		$	145,446
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	12,724			12,013
Amortization of intangibles	84,199			79,284
Asset impairment charges	101,319			54,880
Amortization of prepaid product discounts	16,976			14,685
Deferred income taxes	(12,157		)	(20,587		)
Employee share-based compensation expense	9,481			11,149
Gain on sales of businesses and customer lists	(12,855		)	(8,703		)
Other non-cash items, net	5,482			6,211
Changes in assets and liabilities, net of effect of acquisitions:
Trade accounts receivable	1,466			19,140
Inventories and supplies	(2,009		)	800
Other current assets	(13,030		)	(16,692		)
Non-current assets	(5,116		)	(3,748		)
Accounts payable	(5,453		)	(6,750		)
Prepaid product discount payments	(19,125		)	(20,003		)
Other accrued and non-current liabilities	(35,261		)	(41,229		)
Net cash provided by operating activities	219,102			225,896
Cash flows from investing activities:
Purchases of capital assets	(42,566		)	(34,351		)
Payments for acquisitions, net of cash acquired	(190,396		)	(125,417		)
Proceeds from sales of marketable securities	—			3,500
Other	1,038			2,166
Net cash used by investing activities	(231,924		)	(154,102		)
Cash flows from financing activities:
Proceeds from issuing long-term debt	1,189,500			333,000
Payments on long-term debt	(1,009,139		)	(336,590		)
Proceeds from issuing shares under employee plans	7,300			8,218
Employee taxes paid for shares withheld	(7,969		)	(6,816		)
Payments for common shares repurchased	(120,000		)	(50,070		)
Cash dividends paid to shareholders	(42,943		)	(43,672		)
Other	(4,128		)	(1,281		)
Net cash provided (used) by financing activities	12,621			(97,211		)
Effect of exchange rate change on cash	(1,188		)	2,253
Net change in cash and cash equivalents	(1,389		)	(23,164		)
Cash and cash equivalents, beginning of year	59,240			76,574
Cash and cash equivalents, end of period	$	57,851		$	53,410

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

Amounts within the consolidated balance sheet as of December 31, 2017 have been modified to conform to the current year presentation. Revenue in excess of billings is now presented separately. Previously this amount was included in other current assets. Additionally, amounts within the cash flows from operating activities and the cash flows from investing activities sections of the consolidated statement of cash flows for the nine months ended September 30, 2017 have been modified to conform to the current year presentation. Within cash flows from operating activities, gain on sales of businesses and customer lists is now presented separately. In the previous year, this amount was included within other non-cash items, net. Within cash flows from investing activities, proceeds from company-owned life insurance policies presented in the previous year is now included in other.

Note 2: New accounting pronouncements

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

ASU No. 2014-09 – In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard provides revenue recognition guidance for any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other accounting standards. In addition, the FASB subsequently issued several amendments to the standard. We adopted the standard and all the related amendments on January 1, 2018 using the modified retrospective method. We applied the new guidance to uncompleted contracts as of January 1, 2018 and recorded the cumulative effect of initially applying the standard as an adjustment to retained earnings, with the offset to revenue in excess of billings, other non-current assets and deferred income tax liabilities. We have elected the practical expedient for contract modifications, allowing us to consider the impact of all contract modifications completed prior to January 1, 2018. We have also elected the practical expedient that allows us to disregard the effects of a financing component if the period between payment and performance will be 1 year or less. Election of these practical expedients did not have a significant impact on our results of operations or financial position. Prior periods have not been restated and continue to be reported under the accounting standards in effect for those periods. Adoption of this guidance did not have a significant impact on our results of operations, financial position or cash flows during the nine months ended September 30, 2018, and we do not expect it to have a significant impact on an ongoing basis. The new guidance also expands the required financial statement disclosures regarding revenue recognition. Those disclosures appear below, while information regarding the disaggregation of revenue can be found in Note 14.

Our product revenue is recognized when control of the goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods. In most cases, control is transferred when products are shipped. We recognize the vast majority of our service revenue as the services are provided. Many of our check supply contracts with financial institutions provide for rebates on certain products. We record these rebates as reductions of revenue and as accrued liabilities on our consolidated balance sheets when the related revenue is recognized. Many of our financial institution contracts also require prepaid product discounts in the form of upfront cash payments we make to our financial institution clients. These prepaid product discounts are included in other non-current assets in our consolidated balance sheets and are amortized as reductions of revenue, generally on the straight-line basis, over the contract term. Sales tax collected concurrent with revenue-producing activities is excluded from revenue. Amounts billed to customers for shipping and handlin

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

g are included in revenue, while the related shipping and handling costs are reflected in cost of products. We have elected the practical expedient that allows us to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost, and we accrue costs of shipping and handling when the related revenue is recognized. As part of our Financial Services rewards, incentive and loyalty programs, we receive payments from consumers or our clients for the products and services provided, including hotel stays, gift cards and merchandise, such as apparel, electronics and clothing. This revenue is recorded net of the related fulfillment costs.

Certain of our contracts for data-driven marketing solutions and treasury management outsourcing services within Financial Services have variable consideration that is contingent on either the success of the marketing campaign ("pay-for-performance") or the volume of outsourcing services provided. We recognize revenue for estimated variable consideration as services are provided based on the most likely amount to be realized. Revenue is recognized to the extent that it is probable that a significant reversal of revenue will not occur when the contingency is resolved. Estimates regarding the recognition of variable consideration are updated each quarter. Typically, the amount of consideration for these contracts is finalized within 3 months, although pricing under certain of our outsourcing contracts may be based on annual volume commitments. Revenue recognized from these contracts was approximately $100,000 in 2017. Under the new standard, we have accelerated the recognition of a portion of this variable consideration.

Certain of our contracts for treasury management solutions result from the sale of bundled arrangements that may include hardware, software and professional services, as well as customization and modification of software, and specify the timing of customer billings over the course of the contract. Revenue for these contracts is recognized using a cost-based input method that depicts the transfer of services to the customer. The transaction price is allocated to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost plus margin. When the revenue recognized for uncompleted contracts exceeds the amount of customer billings and the right to receive the consideration is conditional, a contract asset is recorded. These amounts are included in revenue in excess of billings on the consolidated balance sheets and totaled $20,508 as of September 30, 2018 and $9,665 as of January 1, 2018. Additionally, we record an asset for unbilled receivables when the revenue recognized has not been billed to customers in accordance with contractually stated billing terms and the right to receive the consideration is unconditional. These assets are also included in revenue in excess of earnings on our consolidated balance sheets and totaled $13,227 as of September 30, 2018 and $7,674 as of January 1, 2018. When the amount of customer billings for uncompleted contracts exceeds the revenue recognized, a contract liability is reflected in our consolidated balance sheets within accrued liabilities. The amount included in accrued liabilities was $1,563 as of September 30, 2018 and $2,233 as of December 31, 2017.

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

Our payment terms vary by type of customer and the products or services offered. The time period between invoicing and when payment is due is not significant. For certain products, services and customer types, we require payment before the products or services are delivered to the customer. When a customer pays in advance, primarily for treasury management solutions and web hosting services, we defer the revenue and recognize it as the services are performed, generally over a period of less than 1 year. Deferred revenue is included in accrued liabilities and other non-current liabilities in our consolidated balance sheets. The decrease of $8,263 in deferred revenue for the nine months ended September 30, 2018 was driven primarily by the recognition of $39,488 of revenue that was included in deferred revenue as of December 31, 2017, partially offset by cash payments received in advance of satisfying our performance obligations. In addition to the amounts included in deferred revenue, we will recognize revenue in future periods related to remaining performance obligations for certain of our data-driven marketing and treasury management solutions. Generally, these contracts have terms of 1 year or less and many have terms of 3 months or less. The amount of revenue related to these unsatisfied performance obligations is not significant to our annual consolidated revenue.

The new guidance requires that certain costs incurred to obtain contracts be recognized as assets and amortized consistent with the transfer of goods or services to the customer. As such, we are now deferring sales commissions related to obtaining check supply and treasury management solution contracts within Financial Services. These amounts are included in other non-current assets and are amortized as selling, general and administrative (SG&A) expense. Amortization of these

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

amounts on the straight-line basis approximates the timing of the transfer of goods or services to the customer. Generally, these amounts are being amortized over periods of 3 to 6 years. We elected the practical expedient allowing us to expense sales commissions as incurred when the amortization period would have been 1 year or less.

The cumulative effect of the changes made to our unaudited consolidated balance sheet as of January 1, 2018 for the adoption of the new revenue guidance was as follows:



(in thousands)	Balance as of December 31, 2017		Adjustments due to ASU No. 2014-09		Balance as of January 1, 2018
Revenue in excess of billings	$	16,379	$	960	$	17,339
Total current assets	392,966		960		393,926
Other non-current assets	159,756		5,733		165,489
Total assets	$	2,208,827	$	6,693	$	2,215,520

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

The impact of adoption of the new revenue guidance on our unaudited consolidated statements of comprehensive (loss) income for the quarter and nine months ended September 30, 2018 and on our unaudited consolidated balance sheet as of September 30, 2018 was as follows:



(in thousands)	As reported			Effect of adoption			Balance without adoption of ASU No. 2014-09
	Quarter Ended September 30, 2018
Service revenue	$	140,423		$	269		$	140,692
Total revenue	493,190			269			493,459
Cost of services	(64,638		)	(19		)	(64,657		)
Total cost of revenue	(197,634		)	(19		)	(197,653		)
Gross profit	295,556			250			295,806
Selling, general and administrative expense	(208,533		)	(253		)	(208,786		)
Operating loss	(17,282		)	(3		)	(17,285		)
Loss before income taxes	(22,170		)	(3		)	(22,173		)
Income tax provision	(8,913		)	1			(8,912		)
Net loss	$	(31,083	)	$	(2	)	$	(31,085	)

	Nine Months Ended September 30, 2018
Service revenue	$	397,239		$	(300	)	$	396,939
Total revenue	1,473,349			(300		)	1,473,049
Cost of services	(175,894		)	365			(175,529		)
Total cost of revenue	(576,594		)	365			(576,229		)
Gross profit	896,755			65			896,820
Selling, general and administrative expense	(629,272		)	(1,304		)	(630,576		)
Operating income	153,249			(1,239		)	152,010
Income before income taxes	140,377			(1,239		)	139,138
Income tax provision	(47,916		)	320			(47,596		)
Net income	$	92,461		$	(919	)	$	91,542

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)



(in thousands)	As reported		Effect of adoption			Balance without adoption of ASU No. 2014-09
	September 30, 2018
Revenue in excess of billings	$	33,735	$	(895	)	$	32,840
Total current assets	417,342		(895		)	416,447
Other non-current assets	195,547		(7,037		)	188,510
Total assets	$	2,267,367	$	(7,932	)	$	2,259,435

Accrued liabilities	$	234,529	$	(320	)	$	234,209
Total current liabilities	333,305		(320		)	332,985
Deferred income taxes	46,339		(1,727		)	44,612
Retained earnings	957,979		(5,885		)	952,094
Total liabilities and shareholders' equity	$	2,267,367	$	(7,932	)	$	2,259,435

ASU No. 2016-01 – In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The standard is intended to improve the recognition, measurement, presentation and disclosure of financial instruments. We adopted this standard on January 1, 2018. This standard had no impact on our results of operations or financial position. Our financial statement disclosures in Note 7 related to financial instruments have been modified to comply with the new standard.

ASU No. 2016-16 – 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. We adopted this standard on January 1, 2018. No adjustment was required to opening retained earnings. Application of this standard has not had a significant impact on our results of operations or financial position and we do not expect it to have a significant impact on an ongoing basis.

ASU No. 2017-01 – In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The standard revises the definition of a business, which affects many areas of accounting, such as business combinations and disposals and goodwill impairment. The revised definition of a business will likely result in more acquisitions being accounted for as asset acquisitions, as opposed to business combinations. We adopted this standard on January 1, 2018, applying the guidance to transactions occurring on or after this date. Adoption of the standard has not had a significant impact on our results of operations or financial position.

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

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

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



(in thousands)	As previously reported			Effect of adoption			As revised
	Quarter Ended September 30, 2017
Cost of products	$	(129,055	)	$	(137	)	$	(129,192	)
Cost of services	(63,862		)	(17		)	(63,879		)
Total cost of revenue	(192,917		)	(154		)	(193,071		)
Selling, general and administrative expense	(202,999		)	(350		)	(203,349		)
Operating income	53,856			(504		)	53,352
Other income	799			504			1,303
Net income	$	28,801		$	—		$	28,801

	Nine Months Ended September 30, 2017
Cost of products	$	(392,040	)	$	(411	)	$	(392,451	)
Cost of services	(159,250		)	(51		)	(159,301		)
Total cost of revenue	(551,290		)	(462		)	(551,752		)
Selling, general and administrative expense	(628,100		)	(1,050		)	(629,150		)
Operating income	232,688			(1,512		)	231,176
Other income	2,104			1,512			3,616
Net income	$	145,446		$	—		$	145,446

ASU No. 2017-09 – In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting. The standard provides guidance about which changes to the terms or conditions of a share-based payment award require modification accounting, which may result in a different fair value for the award. We adopted this standard on January 1, 2018, and it is being applied prospectively to awards modified on or after this date. Application of this standard has not had a significant impact on our results of operations or financial position and we do not expect it to have a significant impact on an ongoing basis.

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

ASU No. 2018-05 – In March 2018, the FASB issued ASU No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118. The standard added to the FASB Codification the guidance provided by the SEC in December 2017 regarding the accounting for the 2017 Act. We complied with SAB No. 118 when preparing our annual consolidated financial statements for the year ended December 31, 2017. Reasonable estimates were used in determining several of the components of the impact of the 2017 Act, including our 2017 deferred income tax activity and the amount of post-1986 foreign deferred earnings subject to the repatriation toll charge. We are still analyzing certain aspects of the 2017 Act and refining our calculations, which could potentially affect the measurement of our deferred tax balances and the amount of the repatriation toll charge liability, and ultimately could cause us to revise our initial estimates. In addition, changes in interpretations, assumptions and guidance regarding the 2017 Act could have a material impact on our effective tax rate. During the quarter ended September 30, 2018, we recorded a decrease in income tax expense of $1,249 as we refined our accounting for the estimated repatriation toll charge liability, and during the nine months ended September 30, 2018, we recorded a decrease in income tax expense of $1,118.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

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


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


•	finalization of the calculation of post-1986 foreign deferred earnings, which are subject to the repatriation toll charge, including the impact on our 2017 state tax returns to be filed in the fourth quarter of 2018.

Other accounting pronouncements adopted – In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements. The standard removes, modifies and adds certain disclosures related to recurring and nonrecurring fair value measurements. On September 30, 2018, we early adopted the provisions of the standard that remove and modify disclosure requirements. This adoption had minimal impact on our fair value disclosures in Note 7. The additional disclosures required under the new guidance are effective for us on January 1, 2020.

Accounting pronouncements not yet adopted – In February 2016, the FASB issued ASU No. 2016-02, Leasing. The standard is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities for virtually all leases and by requiring the disclosure of key information about leasing arrangements. In July 2018, the FASB issued two amendments to ASU No. 2016-02: ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends narrow aspects of the guidance in ASU No. 2016-02, and ASU No. 2018-11, Targeted Improvements, which provides a new optional transition method under which comparative periods presented in financial statements in the period of adoption would not be restated. All of these standards are effective for us on January 1, 2019. They are required to be adopted using a modified retrospective approach, and we plan to elect the optional transition method under ASU No. 2018-11. We have established an implementation team to evaluate and identify the impact of these standards on our financial position, results of operations and cash flows. We are currently assessing our leasing arrangements and implementing software to meet the reporting requirements of the standard. We anticipate that we will elect the practical expedient package outlined in ASU No. 2016-02 under which we do not have to reassess whether an arrangement contains a lease, we can carryforward our previous classification of leases as either operating or capital leases, and we do not have to reassess previously recorded initial direct costs. Additionally, we anticipate that we will make the policy election allowing us to exclude leases with original terms of 12 months or less from lease assets and liabilities. We continue to assess the practical expedient allowing us to use hindsight to determine the lease term and to assess any impairment of lease assets during the lookback period, and we continue to assess certain policy elections required under the standard, including whether we will separate nonlease components from the associated lease component and how we will determine the incremental borrowing rate for leases with renewal options. Although we will recognize lease assets and liabilities for leases classified as operating leases under previous guidance, we are not able to quantify the impact of the standard at this time.

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

In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The standard modifies certain disclosures related to defined benefit pension and other postretirement plans and requires adoption on a retrospective basis to all periods presented. We plan to early adopt this standard on December 31, 2018, including the modified disclosures in our Form 10-K for the year ending December 31, 2018.

In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the new standard. The guidance is effective for us on January 1, 2020 and may be adopted retrospectively or prospectively to eligible costs incurred on or after the date the guidance is first applied. This new guidance will impact our results of operations and financial position as we currently expense these implementation costs as incurred. As we have not historically tracked these costs separately, we are not able to quantify the expected impact on our consolidated financial statements. We plan to adopt the standard prospectively.

DELUXE CORPORATION

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

Note 3: Supplemental balance sheet information

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



	Nine Months Ended September 30,
(in thousands)	2018			2017
Balance, beginning of year	$	2,884		$	2,828
Bad debt expense	2,275			2,384
Write-offs, net of recoveries	(2,036		)	(2,404		)
Balance, end of period	$	3,123		$	2,808

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



(in thousands)	September 30, 2018		December 31, 2017
Raw materials	$	7,508