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DELUXE CORP - Quarter Report: 2021 March (Form 10-Q)


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

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
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
dlx-20210331_g1.jpg

DELUXE CORPORATION
(Exact name of registrant as specified in its charter) 
MN41-0216800
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3680 Victoria St. N.ShoreviewMN55126-2966
(Address of principal executive offices)
(Zip Code)

(651) 483-7111
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $1.00 per shareDLXNYSE

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes   ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated Filer
Non-accelerated Filer Smaller Reporting Company
Emerging Growth Company

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

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

The number of shares outstanding of registrant’s common stock as of April 28, 2021 was 42,201,575.
1


PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share par value)March 31,
2021
December 31,
2020
ASSETS  
Current assets:  
Cash and cash equivalents$125,440 $123,122 
Trade accounts receivable, net of allowances for uncollectible accounts
139,547 161,959 
Inventories and supplies37,119 40,130 
Funds held for customers, including securities carried at fair value of $25,391 and $28,462, respectively
122,466 119,749 
Revenue in excess of billings
27,655 17,617 
Other current assets52,269 44,054 
Total current assets504,496 506,631 
Deferred income taxes4,636 5,444 
Long-term investments
46,147 45,919 
Property, plant and equipment, net of accumulated depreciation of $365,187 and $360,907, respectively
87,836 88,680 
Operating lease assets41,288 35,906 
Intangibles, net of accumulated amortization of $610,707 and $587,273, respectively
254,152 246,760 
Goodwill736,862 736,844 
Other non-current assets217,835 208,679 
Total assets$1,893,252 $1,874,863 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable$109,064 $116,990 
Funds held for customers120,581 117,647 
Accrued liabilities174,923 177,183 
Total current liabilities404,568 411,820 
Long-term debt840,000 840,000 
Operating lease liabilities34,288 28,344 
Deferred income taxes15,265 10,643 
Other non-current liabilities40,312 43,218 
Commitments and contingencies (Notes 12 and 15)
Shareholders' equity:  
Common shares $1 par value (authorized: 500,000 shares; outstanding: March 31, 2021 – 42,104; December 31, 2020 – 41,973)
42,104 41,973 
Additional paid-in capital22,306 17,558 
Retained earnings534,059 522,599 
Accumulated other comprehensive loss(39,824)(41,433)
Non-controlling interest174 141 
Total shareholders’ equity558,819 540,838 
Total liabilities and shareholders’ equity$1,893,252 $1,874,863 


See Condensed Notes to Unaudited Consolidated Financial Statements
2


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Quarter Ended
March 31,
(in thousands, except per share amounts)20212020
Product revenue$299,053 $330,687 
Service revenue142,211 155,736 
Total revenue441,264 486,423 
Cost of products(107,325)(121,587)
Cost of services (71,184)(80,462)
Total cost of revenue(178,509)(202,049)
Gross profit262,755 284,374 
Selling, general and administrative expense(212,436)(237,204)
Restructuring and integration expense(14,313)(17,654)
Asset impairment charges— (90,330)
Operating income (loss)36,006 (60,814)
Interest expense(4,524)(6,999)
Other income2,033 4,472 
Income (loss) before income taxes33,515 (63,341)
Income tax (provision) benefit(9,190)3,210 
Net income (loss)24,325 (60,131)
Net income attributable to non-controlling interest(33)— 
Net income (loss) attributable to Deluxe$24,292 $(60,131)
Total comprehensive income (loss)$25,934 $(72,138)
Comprehensive income (loss) attributable to Deluxe25,901 (72,138)
Basic earnings (loss) per share0.58 (1.43)
Diluted earnings (loss) per share0.57 (1.45)


See Condensed Notes to Unaudited Consolidated Financial Statements

3


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
(in thousands)Common sharesCommon shares
par value
Additional paid-in capitalRetained earningsAccumulated other comprehensive lossNon-controlling interestTotal
Balance, December 31, 2020
41,973 $41,973 $17,558 $522,599 $(41,433)$141 $540,838 
Net income— — — 24,292 — 33 24,325 
Cash dividends ($0.30 per share)
— — — (12,832)— — (12,832)
Common shares issued194 194 847 — — — 1,041 
Common shares retired(63)(63)(2,298)— — — (2,361)
Employee share-based compensation
— — 6,199 — — — 6,199 
Other comprehensive income
— — — — 1,609 — 1,609 
Balance, March 31, 2021
42,104 $42,104 $22,306 $534,059 $(39,824)$174 $558,819 


(in thousands)Common sharesCommon shares
par value
Additional paid-in capitalRetained earningsAccumulated other comprehensive lossTotal
Balance, December 31, 2019
42,126 $42,126 $4,086 $572,596 $(47,947)$570,861 
Net loss— — — (60,131)— (60,131)
Cash dividends ($0.30 per share)
— — — (12,861)— (12,861)
Common shares issued81 81 1,801 — — 1,882 
Common shares repurchased
(499)(499)(9,767)(3,734)— (14,000)
Other common shares retired(17)(17)(779)— — (796)
Employee share-based compensation
— — 4,659 — — 4,659 
Adoption of Accounting Standards Update No. 2016-13
— — — (3,640)— (3,640)
Other comprehensive loss
— — — — (12,007)(12,007)
Balance, March 31, 2020
41,691 $41,691 $— $492,230 $(59,954)$473,967 



See Condensed Notes to Unaudited Consolidated Financial Statements

4


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Quarter Ended March 31,
(in thousands)20212020
Cash flows from operating activities:  
Net income (loss)$24,325 $(60,131)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Depreciation4,516 4,919 
Amortization of intangibles23,264 23,511 
Operating lease expense4,576 3,933 
Asset impairment charges— 90,330 
Amortization of prepaid product discounts7,440 7,077 
Deferred income taxes5,245 (9,129)
Employee share-based compensation expense6,742 3,618 
Other non-cash items, net2,418 8,439 
Changes in assets and liabilities:  
Trade accounts receivable23,122 3,575 
Inventories and supplies1,042 (3,165)
Other current assets(19,711)(7,403)
Non-current assets(9,868)(917)
Accounts payable(3,543)(10,145)
Prepaid product discount payments(9,590)(7,321)
Other accrued and non-current liabilities(20,397)(20,723)
Net cash provided by operating activities39,581 26,468 
Cash flows from investing activities:  
Purchases of capital assets(21,670)(14,269)
Purchases of customer funds marketable securities(29)(34)
Proceeds from customer funds marketable securities29 34 
Other(180)354 
Net cash used by investing activities(21,850)(13,915)
Cash flows from financing activities:  
Proceeds from issuing long-term debt5,000 309,000 
Payments on long-term debt(5,000)(52,500)
Net change in customer funds obligations1,659 (19,407)
Proceeds from issuing shares under employee plans673 1,736 
Employee taxes paid for shares withheld(2,360)(757)
Payments for common shares repurchased— (14,000)
Cash dividends paid to shareholders(12,932)(12,714)
Other(1,271)(202)
Net cash (used) provided by financing activities(14,231)211,156 
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents
1,606 (12,717)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents5,106 210,992 
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year229,409 174,811 
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3)$234,515 $385,803 


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 March 31, 2021, the consolidated statements of comprehensive income (loss) for the quarters ended March 31, 2021 and 2020, the consolidated statements of shareholders’ equity for the quarters ended March 31, 2021 and 2020 and the consolidated statements of cash flows for the quarters ended March 31, 2021 and 2020 are unaudited. The consolidated balance sheet as of December 31, 2020 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 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, 2020 (the 2020 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, including the estimated impact of extraordinary events, such as the novel coronavirus (COVID-19) pandemic, the results of which form the basis for making judgments about the carrying values of our assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Actual results may differ significantly from our estimates and assumptions, including our estimates of the severity and duration of the COVID-19 pandemic. Further information can be found in Note 15.

Comparability During the second quarter of 2020, we identified certain misstatements in our consolidated statement of cash flows for the quarter ended March 31, 2020. Within cash flows from financing activities, proceeds from issuing long-term debt and payments on long-term debt did not properly reflect the borrowing and payment activity that occurred during the quarter. Additionally, we identified a misstatement related to the presentation of unpaid capital expenditures, which impacted the amount reported for the change in accounts payable within cash provided by operating activities and the amount reported for purchases of capital assets within investing activities.

We assessed the materiality of these misstatements on prior period financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements. We concluded that the misstatements were not material to any prior interim period and therefore, amendments of previously filed reports were not required. In accordance with ASC 250, we have corrected the misstatements by revising the consolidated financial statements appearing herein. The revisions had no impact on total assets, total liabilities, shareholders' equity or net income.

The impact of the revisions on the consolidated statement of cash flows for the quarter ended March 31, 2020 was as follows:

(in thousands)Previously reportedAdjustmentRevised
Accounts payable$(18,059)$7,914 $(10,145)
Net cash provided by operating activities18,554 7,914 26,468 
Purchases of capital assets(6,355)(7,914)(14,269)
Net cash used by investing activities(6,001)(7,914)(13,915)
Proceeds from issuing long-term debt1,011,000 (702,000)309,000 
Payments on long-term debt(754,500)702,000 (52,500)
Net cash provided by financing activities211,156 — 211,156 
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents$210,992 $— $210,992 


6

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

NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update No. 2019-12, Simplifying the Accounting for Income Taxes. This standard addressed several specific areas of accounting for income taxes. We adopted this standard on January 1, 2021. Portions of the standard were adopted prospectively and certain aspects were required to be adopted using the modified retrospective approach. Adoption of this standard did not require an adjustment to retained earnings and did not have a significant impact on our results of operations or financial position.


NOTE 3: SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Trade accounts receivable Changes in the allowances for uncollectible accounts included within trade accounts receivable were as follows for the quarters ended March 31, 2021 and 2020:
Quarter Ended
March 31,
(in thousands)20212020
Balance, beginning of year$6,428 $4,985 
Bad debt (benefit) expense(649)1,059 
Write-offs and other(900)(2,098)
Balance, end of period$4,879 $3,946 

Inventories and supplies – Inventories and supplies were comprised of the following:
(in thousands)March 31,
2021
December 31,
2020
Raw materials$5,415 $5,412 
Semi-finished goods7,916 7,943 
Finished goods31,464 33,513 
Supplies5,263 5,010 
Reserve for excess and obsolete items(12,939)(11,748)
Inventories and supplies$37,119 $40,130 

7

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Changes in the reserve for excess and obsolete items were as follows for the quarters ended March 31, 2021 and 2020:

Quarter Ended
March 31,
(in thousands)20212020
Balance, beginning of year$11,748 $6,600 
Amounts charged to expense2,013 88 
Write-offs(822)(335)
Balance, end of period$12,939 $6,353 

Available-for-sale debt securities – Available-for-sale debt securities included within funds held for customers were comprised of the following:
 March 31, 2021
(in thousands)CostGross unrealized gainsGross unrealized lossesFair value
Funds held for customers:(1)
Domestic money market fund
$12,000 $— $— $12,000 
Canadian and provincial government securities
9,722 — (311)9,411 
Canadian guaranteed investment certificate3,980 — — 3,980 
Available-for-sale debt securities$25,702 $— $(311)$25,391 

(1) Funds held for customers, as reported on the consolidated balance sheet as of March 31, 2021, also included cash of $97,075.
 December 31, 2020
(in thousands)CostGross unrealized gainsGross unrealized lossesFair value
Funds held for customers:(1)
Domestic money market fund
$15,000 $— $— $15,000 
Canadian and provincial government securities9,566 — (33)9,533 
Canadian guaranteed investment certificate3,929 — — 3,929 
Available-for-sale debt securities$28,495 $— $(33)$28,462 
 
(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2020, also included cash of $91,287.
Expected maturities of available-for-sale debt securities as of March 31, 2021 were as follows:
(in thousands)Fair value
Due in one year or less$14,550 
Due in two to five years7,971 
Due in six to ten years2,870 
Available-for-sale debt securities$25,391 

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

8

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Revenue in excess of billings – Revenue in excess of billings was comprised of the following:
(in thousands)March 31,
2021
December 31,
2020
Conditional right to receive consideration$20,072 $13,950 
Unconditional right to receive consideration(1)
7,583 3,667 
Revenue in excess of billings$27,655 $17,617 

(1) Represents revenues that are earned but not currently billable under the related contract terms. Trade accounts receivable on the consolidated balance sheets included unbilled receivables of $19,295 as of March 31, 2021 and $21,319 as of December 31, 2020.

Intangibles – Intangibles were comprised of the following:
 March 31, 2021December 31, 2020
(in thousands)Gross carrying amountAccumulated amortizationNet carrying amountGross carrying amountAccumulated amortizationNet carrying amount
Amortizable intangibles:      
Internal-use software$397,675 $(314,125)$83,550 $380,144 $(303,422)$76,722 
Customer lists/relationships366,241 (212,425)153,816 352,895 (202,428)150,467 
Software to be sold36,900 (24,941)11,959 36,900 (23,884)13,016 
Technology-based intangibles33,813 (29,163)4,650 33,813 (27,613)6,200 
Trade names30,230 (30,053)177 30,281 (29,926)355 
Intangibles$864,859 $(610,707)$254,152 $834,033 $(587,273)$246,760 

Amortization of intangibles was $23,264 for the quarter ended March 31, 2021 and $23,511 for the quarter ended March 31, 2020. Based on the intangibles in service as of March 31, 2021, estimated future amortization expense is as follows:
(in thousands)Estimated
amortization
expense
Remainder of 2021$65,583 
202268,285 
202348,720 
202423,206 
202517,327 

The following intangibles were acquired during the quarter ended March 31, 2021:
(in thousands)AmountWeighted-average amortization period
(in years)
Internal-use software$17,321 3
Customer lists/relationships13,302 8
Acquired intangibles$30,623 5
9

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

Goodwill – Changes in goodwill by reportable segment and in total for the quarter ended March 31, 2021 were as follows:
(in thousands)PaymentsCloud SolutionsPromotional SolutionsChecksTotal
Balance, December 31, 2020:    
Goodwill, gross$168,165 $432,984 $252,864 $434,812 $1,288,825 
Accumulated impairment charges— (362,058)(189,923)— (551,981)
Goodwill, net of accumulated impairment charges
168,165 70,926 62,941 434,812 736,844 
Currency translation adjustment— — 18 — 18 
Balance, March 31, 2021
$168,165 $70,926 $62,959 $434,812 $736,862 
Balance, March 31, 2021:
    
Goodwill, gross$168,165 $432,984 $252,882 $434,812 $1,288,843 
Accumulated impairment charges— (362,058)(189,923)— (551,981)
Goodwill, net of accumulated impairment charges
$168,165 $70,926 $62,959 $434,812 $736,862 
Other non-current assets – Other non-current assets were comprised of the following:
(in thousands)March 31,
2021
December 31,
2020
Postretirement benefit plan asset$72,775 $71,208 
Prepaid product discounts51,044 50,602 
Cloud computing arrangements38,249 29,242 
Loans and notes receivable from distributors, net of allowances for doubtful accounts(1)
27,182 35,068 
Deferred sales commissions(2)
15,461 9,199 
Other13,124 13,360 
Other non-current assets$217,835 $208,679 

(1) 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 $1,704 as of March 31, 2021 and $2,008 as of December 31, 2020.

(2) Amortization of deferred sales commissions was $972 for the quarter ended March 31, 2021 and $882 for the quarter ended March 31, 2020.

Changes in the allowances for uncollectible accounts related to loans and notes receivable from distributors were as follows for the quarters ended March 31, 2021 and 2020:
Quarter Ended
March 31,
(in thousands)20212020
Balance, beginning of year$3,995 $284 
Adoption of ASU No. 2016-13— 4,749 
Bad debt (benefit) expense(634)5,382 
Balance, end of period$3,361 $10,415 

During the quarter ended March 31, 2020, we recorded a loan-specific allowance related to a distributor that was underperforming. In calculating this reserve, we utilized various valuation techniques to determine the value of the underlying collateral, resulting in an allowance of $6,128 as of March 31, 2020. Other past due receivables and those on non-accrual status were not significant as of March 31, 2021 or December 31, 2020.

We categorize loans and notes receivable into risk categories based on information about the ability of borrowers to service their debt, including current financial information, historical payment experience, current economic trends and other
10

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

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, 2021. There were no write-offs or recoveries recorded during the quarter ended March 31, 2021.
Loans and notes receivable from distributors amortized cost basis by origination year
(in thousands)2020201920182017PriorTotal
Risk rating:
1-2 internal grade$1,310 $587 $14,546 $11,744 $1,481 $29,668 
3-4 internal grade— 2,579 — — — 2,579 
Loans and notes receivable
$1,310 $3,166 $14,546 $11,744 $1,481 $32,247 

Changes in prepaid product discounts during the quarters ended March 31, 2021 and 2020 were as follows:
 Quarter Ended
March 31,
(in thousands)20212020
Balance, beginning of year$50,602 $51,145 
Additions(1)
7,890 2,470 
Amortization(7,440)(7,077)
Other(8)(544)
Balance, end of period$51,044 $45,994 
 (1) Prepaid product discounts are generally accrued upon contract execution. Cash payments for prepaid product discounts were $9,590 for the quarter ended March 31, 2021 and $7,321 for the quarter ended March 31, 2020.

Accrued liabilities – Accrued liabilities were comprised of the following:
(in thousands)March 31,
2021
December 31,
2020
Deferred revenue(1)
$49,469 $42,104 
Employee cash bonuses, including sales incentives17,005 21,090 
Prepaid product discounts due within one year12,640 14,365 
Operating lease liabilities10,914 11,589 
Customer rebates7,046 8,179 
Other77,849 79,856 
Accrued liabilities$174,923 $177,183 
 
(1) $16,121 of the December 31, 2020 amount was recognized as revenue during the quarter ended March 31, 2021.

Supplemental cash flow information – The reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents to the consolidated balance sheets was as follows:
(in thousands)March 31,
2021
March 31,
2020
Cash and cash equivalents$125,440 $310,146 
Restricted cash and restricted cash equivalents included in funds held for customers109,075 75,657 
Total cash, cash equivalents, restricted cash and restricted cash equivalents$234,515 $385,803 

11

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 4: EARNINGS (LOSS) PER SHARE

The following table reflects the calculation of basic and diluted earnings (loss) per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted earnings (loss) per share because their effect would have been antidilutive. 
 Quarter Ended
March 31,
(in thousands, except per share amounts)20212020
Earnings (loss) per share – basic:  
Net income (loss)$24,325 $(60,131)
Net income attributable to non-controlling interest(33)— 
Net income (loss) attributable to Deluxe24,292 (60,131)
Income allocated to participating securities(19)(21)
Income (loss) attributable to Deluxe available to common shareholders
$24,273 $(60,152)
Weighted-average shares outstanding42,046 42,028 
Earnings (loss) per share – basic$0.58 $(1.43)
Earnings (loss) per share – diluted:
Net income (loss)$24,325 $(60,131)
Net income attributable to non-controlling interest(33)— 
Net income (loss) attributable to Deluxe24,292 (60,131)
Income allocated to participating securities— (21)
Re-measurement of share-based awards classified as liabilities
— (775)
Income (loss) attributable to Deluxe available to common shareholders
$24,292 $(60,927)
Weighted-average shares outstanding42,046 42,028 
Dilutive impact of potential common shares458 37 
Weighted-average shares and potential common shares outstanding
42,504 42,065 
Earnings (loss) per share – diluted$0.57 $(1.45)
Antidilutive options excluded from calculation2,423 2,214 


12

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 5: OTHER COMPREHENSIVE INCOME (LOSS)

Reclassification adjustments Information regarding amounts reclassified from accumulated other comprehensive loss to net income (loss) was as follows:
Accumulated other comprehensive loss componentsAmounts reclassified from accumulated other comprehensive lossAffected line item in consolidated statements of comprehensive income (loss)
Quarter Ended
March 31,
(in thousands)20212020
Realized (loss) gain on interest rate swap
$(334)$93 Interest expense
Tax benefit (expense)
87 (24)Income tax (provision) benefit
Realized (loss) gain on interest rate swap, net of tax
(247)69 Net income (loss)
Amortization of postretirement benefit plan items:
Prior service credit355 355 Other income
Net actuarial loss(407)(575)Other income
Total amortization(52)(220)Other income
Tax (expense) benefit(31)12 Income tax (provision) benefit
Amortization of postretirement benefit plan items, net of tax(83)(208)Net income (loss)
Total reclassifications, net of tax$(330)$(139)

Accumulated other comprehensive loss Changes in the components of accumulated other comprehensive loss during the quarter ended March 31, 2021 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 adjustmentAccumulated other comprehensive loss
Balance, December 31, 2020$(21,956)$(90)$(5,351)$(14,036)$(41,433)
Other comprehensive (loss) income before reclassifications
— (204)477 1,006 1,279 
Amounts reclassified from accumulated other comprehensive loss
83 — 247 — 330 
Net current-period other comprehensive income (loss)
83 (204)724 1,006 1,609 
Balance, March 31, 2021
$(21,873)$(294)$(4,627)$(13,030)$(39,824)

(1) Other comprehensive loss before reclassifications is net of an income tax benefit of $71.

(2) Other comprehensive income before reclassifications is net of income tax expense of $168.


13

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

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 the amount drawn under our revolving credit facility (Note 11). The interest rate swap, which terminates in March 2023 when our revolving credit facility matures, effectively converts $200,000 of variable rate debt to a fixed rate of 1.798%. Changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive loss on the consolidated balance 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 $6,231 as of March 31, 2021 and $7,210 as of December 31, 2020 and was included in other non-current liabilities on the consolidated balance sheets. The fair value of this derivative is calculated based on the prevailing LIBOR rate curve on the date of measurement. The cash flow hedge was fully effective as of March 31, 2021 and December 31, 2020 and its impact on consolidated net income (loss) and our consolidated statements of cash flows was not significant. We also do not expect the amount to be reclassified to interest expense over the next 12 months to be significant.


NOTE 7: FAIR VALUE MEASUREMENTS

Our policies on impairment of goodwill and indefinite-lived intangible assets and impairment of long-lived assets and amortizable intangibles explain our methodology for assessing impairment of these assets and can be found under the caption "Note 1: Significant Accounting Policies" in the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.

2020 asset impairment chargesDuring the quarter ended March 31, 2020, we concluded that a triggering event had occurred for 2 of our reporting units as a result of the COVID-19 pandemic. As such, we completed goodwill impairment analyses for these reporting units as of March 31, 2020. Our analyses indicated that the goodwill of our Promotional Solutions reporting unit was partially impaired and the goodwill of our Cloud Solutions Web Hosting reporting unit was fully impaired. As such, we recorded goodwill impairment charges of $63,356 and $4,317, respectively. The impairment charges were measured as the amount by which the reporting units' carrying values exceeded their estimated fair values, limited to the carrying amount of goodwill. After the impairment charges, $62,785 of goodwill remained in the Promotional Solutions reporting unit as of the measurement date.

Also as a result of the impacts of the COVID-19 pandemic, we assessed for impairment certain long-lived assets of our Cloud Solutions Web Hosting reporting unit as of March 31, 2020. As a result of these assessments, we recorded asset impairment charges of $17,678, primarily related to customer list, software and trade name intangible assets. With the exception of certain internal-use software assets, we determined that the assets were fully impaired. We utilized the discounted value of estimated future cash flows to estimate the fair value of the asset group. In our analysis, we assumed a revenue decline of 31% and a gross margin decline of 5.2 points in 2020, as well as a discount rate of 9%.

During the first quarter of 2020, we assessed for impairment the carrying value of an asset group related to a small business distributor that we previously purchased. Our assessment was the result of customer attrition during the quarter that impacted our projections of future cash flows. Based on our estimate of discounted future cash flows, we determined that the asset group was partially impaired as of February 29, 2020, and we recorded an asset impairment charge of $2,752, reducing the carrying value of the related customer list intangible asset. In calculating the estimated fair value of the asset group, we assumed no revenue growth, a 1.9 point improvement in gross margin and a discount rate of 11%. Also during the first quarter of 2020, we recorded asset impairment charges of $2,227 related to internal-use software and a small business distributor held for sale. Customer attrition in the business utilizing the software caused us to evaluate the asset for impairment, and this analysis indicated that the software was fully impaired. During the first quarter of 2020, we agreed to sales terms for the small business distributor. Based on the negotiated sales price, we recorded an asset impairment charge to write-down the carrying value of the asset group to its fair value less costs to sell.

14

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Information regarding the asset impairment analyses completed during the quarter ended March 31, 2020 was as follows:
 Fair value measurements using
Fair value as of measurement dateQuoted prices in active markets for identical assetsSignificant other observable inputsSignificant unobservable inputsImpairment charge
(in thousands)(Level 1)(Level 2)(Level 3)
Intangible assets (Cloud Solutions Web Hosting reporting unit)(1)
$2,172 $— $— $2,172 $17,678 
Small business distributor
7,622 — — 7,622 2,752 
Other assets1,412 — — 1,412 2,227 
Goodwill67,673 
Total$90,330 

(1) The impairment charge consisted of $8,397 related to customer lists, $6,932 related to internal-use software and $2,349 related to other intangible assets.

Recurring fair value measurements Funds held for customers included available-for-sale debt securities (Note 3). These securities included a money market fund that is traded in an active market, a mutual fund investment that invests in Canadian and provincial government securities, and an investment in a Canadian guaranteed investment certificate (GIC) with a maturity of 2 years. The cost of the money market fund approximates its fair value because of the short-term nature of the investment. The cost of the GIC approximates its fair value, based on estimates using current market rates offered for deposits with similar remaining maturities. 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. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss on the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue on the consolidated statements of comprehensive income (loss) and were not significant during the quarters ended March 31, 2021 and 2020.

Information regarding the fair values of our financial instruments was as follows:
 Fair value measurements using
March 31, 2021Quoted prices in active markets for identical assets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
(in thousands)Balance sheet locationCarrying valueFair value
Measured at fair value through comprehensive income (loss):
Cash equivalents
Funds held for customers$12,000 $12,000 $12,000 $— $— 
Available-for-sale debt securities
Funds held for customers13,391 13,391 — 13,391 — 
Derivative liability (Note 6)Other non-current liabilities(6,231)(6,231)— (6,231)— 
Amortized cost:
CashCash and cash equivalents125,440 125,440 125,440 — — 
Cash
Funds held for customers97,075 97,075 97,075 — — 
Loans and notes receivable from distributors
Other current and non-current assets28,886 28,843 — — 28,843 
Long-term debt
Long-term debt840,000 840,000 — 840,000 — 

15

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
 Fair value measurements using
December 31, 2020Quoted prices in active markets for identical assets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
(in thousands)Balance sheet locationCarrying valueFair value
Measured at fair value through comprehensive income (loss):
Cash equivalents
Funds held for customers$15,000 $15,000 $15,000 $— $— 
Available-for-sale debt securities
Funds held for customers13,462 13,462 — 13,462 — 
Derivative liability (Note 6)Other non-current liabilities(7,210)(7,210)— (7,210)— 
Amortized cost:
CashCash and cash equivalents123,122 123,122 123,122 — — 
Cash
Funds held for customers91,287 91,287 91,287 — — 
Loans and notes receivable from distributors
Other current and non-current assets37,076 36,950 — — 36,950 
Long-term debt
Long-term debt840,000 840,000 — 840,000 — 


NOTE 8: 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 and relocation and costs associated with facility closures. In addition, we recorded employee severance costs related to these initiatives, as well as our ongoing cost reduction initiatives across functional areas. We are currently pursuing several initiatives designed to focus on 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 (loss) as follows:
 Quarter Ended
March 31,
(in thousands)20212020
Total cost of revenue$899 $829 
Operating expenses14,313 17,654 
Restructuring and integration expense$15,212 $18,483 

16

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)20212020
External consulting fees$7,383 $10,901 
Internal labor2,041 1,853 
Employee severance benefits857 5,083 
Other4,931 646 
Restructuring and integration expense$15,212 $18,483 

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 are expected to be completed in the second quarter of 2021, and we expect most of the related severance payments to be paid by mid-2021, utilizing cash from operations.

Changes in our restructuring and integration accruals were as follows:
(in thousands)Employee severance benefits
Balance, December 31, 2020
$6,798 
Charges1,877 
Reversals(1,020)
Payments(5,701)
Balance, March 31, 2021
$1,954 

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.

17

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 9: INCOME TAX PROVISION (BENEFIT)

The effective tax rate on pre-tax income (loss) reconciles to the U.S. federal statutory tax rate as follows:
Quarter Ended March 31, 2021Year Ended December 31, 2020
Income tax at federal statutory rate21.0 %21.0 %
Goodwill impairment charges (Note 7)— 39.2 %
State income tax expense, net of federal income tax benefit3.8 %1.7 %
Tax impact of share-based compensation2.1 %7.4 %
Non-deductible executive compensation0.9 %2.0 %
Foreign tax rate differences0.6 %3.7 %
Change in unrecognized tax benefits, including interest and penalties0.3 %(2.9 %)
Payables and receivables for prior year tax returns(0.9 %)2.8 %
Research and development tax credit(0.6 %)(3.3 %)
Return to provision adjustments— (2.3 %)
Change in valuation allowances— 0.8 %
Other0.2 %0.8 %
Effective tax rate27.4 %70.9 %


NOTE 10: POSTRETIREMENT BENEFITS

We have historically provided certain health care benefits for a large number of retired U.S. employees. In addition to our retiree health care plan, we also have a U.S. supplemental executive retirement plan. Further information regarding our postretirement benefit plans can be found under the caption “Note 14: Postretirement Benefits” in the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.

Postretirement benefit income is included in other income on the consolidated statements of comprehensive income (loss) and consisted of the following components:
Quarter Ended
March 31,
(in thousands)20212020
Interest cost$242 $478 
Expected return on plan assets(1,875)(1,905)
Amortization of prior service credit(355)(355)
Amortization of net actuarial losses407 575 
Net periodic benefit income$(1,581)$(1,207)

18

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

Debt outstanding consisted of amounts drawn on our revolving credit facility of $840,000 as of March 31, 2021 and December 31, 2020. As of March 31, 2021, the total availability under our revolving credit facility was $1,150,000. The facility includes an accordion feature allowing us, subject to lender consent, to increase the credit commitment to an aggregate amount not exceeding $1,425,000. The credit facility matures in March 2023. Our quarterly commitment fee ranges from 0.175% to 0.35% based on our leverage ratio. Amounts drawn under the credit facility had a weighted-average interest rate of 2.00% as of March 31, 2021 and 2.01% as of December 31, 2020. In July 2019, we executed an interest rate swap to convert $200,000 of the amount drawn under the credit facility to fixed rate debt. Further information can be found in Note 6.

Borrowings under the credit agreement are collateralized by substantially all of our personal and intangible property. The credit agreement governing our credit facility contains customary covenants regarding limits on levels of subsidiary indebtedness and capital expenditures, liens, investments, acquisitions, certain mergers, certain asset sales outside the ordinary course of business and change in control as defined in the agreement. The agreement also requires us to maintain certain financial ratios, including a maximum leverage ratio of 3.5 and a minimum ratio of consolidated earnings before interest and taxes to consolidated interest expense, as defined in the credit agreement, of 3.0. Additionally, the agreement contains customary representations and warranties and, as a condition to borrowing, requires that all such representations and warranties be true and correct in all material respects on the date of each borrowing, including representations as to no material adverse change in our business, assets, operations or financial condition.

There are currently no limitations on the amount of dividends and share repurchases under the terms of our credit agreement. However, if our leverage ratio, defined as total debt less unrestricted cash to EBITDA, should exceed 2.75 to 1, there would be an annual limitation on the amount of dividends and share repurchases.

Daily average amounts outstanding under our credit facility were as follows:
(in thousands)Quarter Ended March 31, 2021Year Ended
December 31, 2020
Daily average amount outstanding$840,165 $1,016,896 
Weighted-average interest rate
2.00 %2.12 %

As of March 31, 2021, amounts were available for borrowing under our revolving credit facility as follows:
(in thousands)Total
available
Revolving credit facility commitment$1,150,000 
Amount drawn on revolving credit facility(840,000)
Outstanding letters of credit(1)
(7,658)
Net available for borrowing as of March 31, 2021
$302,342 

(1) We use standby letters of credit to collateralize certain obligations related primarily to our self-insured workers’ compensation claims, as well as claims for environmental matters, as required by certain states. These letters of credit reduce the amount available for borrowing under our revolving credit facility.


NOTE 12: OTHER COMMITMENTS AND CONTINGENCIES

Leases – During the third quarter of 2020, we executed a lease on a facility located in Minnesota with a term of 16 years. As this lease has not yet commenced, it was not reflected on the consolidated balance sheets as of March 31, 2021 or December 31, 2020. The total obligation under this lease is approximately $43,000, with approximately $4,000 due in 2022 - 2023, approximately $5,000 due in 2024 - 2025 and the remainder due through 2037.

Indemnifications – In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. These indemnification provisions generally encompass third-party claims arising from our products and services, including, without limitation, service failures, breach of security, intellectual property rights, governmental regulations and/or employment-related matters. Performance under these indemnities would generally be triggered by our breach of the terms of the contract. In disposing of assets or businesses, we often provide representations, warranties and/or indemnities to cover various risks, including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities,
19

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
and unidentified tax liabilities and legal matters related to periods prior to disposition. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we do not believe that any liability under these indemnities would have a material adverse effect on our financial position, annual results of operations or annual cash flows. We have recorded liabilities for known indemnifications related to environmental matters. These liabilities were not significant as of March 31, 2021 or December 31, 2020.

Self-insurance – We are self-insured for certain costs, primarily workers' compensation claims and medical and dental benefits for active employees and those employees on long-term disability. The liabilities associated with these items represent our best estimate of the ultimate obligations for reported claims plus those incurred, but not reported, and totaled $8,383 as of March 31, 2021 and $9,046 as of December 31, 2020. These accruals are included in accrued liabilities and other non-current liabilities on the consolidated balance sheets. Our workers' compensation liability is recorded at present value. The difference between the discounted and undiscounted liability was not significant as of March 31, 2021 or December 31, 2020.

Our self-insurance liabilities are estimated, in part, by considering historical claims experience, demographic factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future events and claims differ from these assumptions and historical trends.

Litigation – Recorded liabilities for legal matters, as well as related charges recorded in each period, were not material to our financial position, results of operations or liquidity during the periods presented, and we do not believe that any of the currently identified claims or litigation will materially affect our financial position, results of operations or liquidity, upon resolution. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on our financial position, results of operations or liquidity in the period in which the ruling occurs or in future periods.


NOTE 13: SHAREHOLDERS' EQUITY

In October 2018, our board of directors authorized the repurchase of up to $500,000 of our common stock. This authorization has no expiration date. No shares were repurchased during the first quarter of 2021 and $287,452 remained available for repurchase under the authorization as of March 31, 2021.


NOTE 14: BUSINESS SEGMENT INFORMATION

We operate 4 reportable segments, generally organized by product type, as follows:

Payments – This segment includes our treasury management solutions, including remittance and lockbox processing, remote deposit capture, receivables management, payment processing and paperless treasury management, in addition to payroll and disbursement services, including Deluxe Payment Exchange, and fraud and security services.

Cloud Solutions – This segment includes web hosting and design services, data-driven marketing solutions and hosted solutions, including digital engagement, logo design, financial institution profitability reporting and business incorporation services.

Promotional Solutions – This segment includes business forms, accessories, advertising specialties, promotional apparel, retail packaging and strategic sourcing services.

Checks – This segment includes printed personal and business checks.

The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in the 2020 Form 10-K. We allocate corporate costs for our shared services functions to our business segments when the costs are directly attributable to a segment. This includes certain sales and marketing, human resources, supply chain, real estate, finance, information technology and legal costs. Costs that are not directly attributable to a business segment are reported as Corporate operations and consist primarily of marketing, accounting, information technology, facilities, executive management and legal, tax and treasury costs that support the corporate function. Corporate operations also includes other income. All of our segments operate primarily in the U.S., with some operations in Canada. In addition, Cloud Solutions has operations in Australia and portions of Europe, as well as partners in Central and South America.

Our chief operating decision maker (i.e., our Chief Executive Officer) reviews earnings before interest, taxes, depreciation and amortization (EBITDA) on an adjusted basis for each segment when deciding how to allocate resources and to assess
20

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
segment operating performance. Adjusted EBITDA for each segment excludes depreciation and amortization expense, interest expense, income tax expense and certain other amounts, which may include, from time to time: asset impairment charges; restructuring, integration and other costs; CEO transition costs; share-based compensation expense; acquisition transaction costs; certain legal-related expense; and gains or losses on sales of businesses and customer lists. Our Chief Executive Officer does not review segment asset information when making investment or operating decisions regarding our reportable business segments.

Segment information for the quarters ended March 31, 2021 and 2020 was as follows:

Quarter Ended March 31,
(in thousands)20212020
Payments:
Revenue$79,438 $77,040 
Adjusted EBITDA18,329 18,023 
Cloud Solutions:
Revenue62,220 75,945 
Adjusted EBITDA17,209 14,920 
Promotional Solutions:
Revenue124,507 142,794 
Adjusted EBITDA17,714 11,197 
Checks:
Revenue175,099 190,644 
Adjusted EBITDA83,534 90,712 
Total segment:
Revenue$441,264 $486,423 
Adjusted EBITDA136,786 134,852 

The following table presents a reconciliation of total segment adjusted EBITDA to consolidated income (loss) before income taxes:
Quarter Ended March 31,
(in thousands)20212020
Total segment adjusted EBITDA$136,786 $134,852 
Corporate operations(46,281)(51,518)
Depreciation and amortization expense(27,780)(28,430)
Interest expense(4,524)(6,999)
Net income attributable to non-controlling interest33 — 
Asset impairment charges— (90,330)
Restructuring, integration and other costs
(15,212)(19,633)
CEO transition costs— 180 
Share-based compensation expense(6,742)(3,618)
Acquisition transaction costs(2,765)(9)
Certain legal-related benefit— 2,164 
Income (loss) before income taxes$33,515 $(63,341)



21

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The following tables present revenue disaggregated by our product and service offerings:
Quarter Ended March 31, 2021
(in thousands)PaymentsCloud SolutionsPromotional SolutionsChecksConsolidated
Checks$— $— $— $175,099 $175,099 
Forms and other products
— — 71,781 — 71,781 
Treasury management solutions
59,136 — — — 59,136 
Marketing and promotional solutions
— — 52,726 — 52,726 
Data-driven marketing solutions
— 33,646 — — 33,646 
Web and hosted solutions
— 28,574 — — 28,574 
Other payments solutions
20,302 — — — 20,302 
Total revenue$79,438 $62,220 $124,507 $175,099 $441,264 
Quarter Ended March 31, 2020
(in thousands)PaymentsCloud SolutionsPromotional SolutionsChecksConsolidated
Checks$— $— $— $190,644 $190,644 
Forms and other products
— — 81,813 — 81,813 
Treasury management solutions
56,867 — — — 56,867 
Marketing and promotional solutions
— — 60,981 — 60,981 
Data-driven marketing solutions
— 38,997 — — 38,997 
Web and hosted solutions
— 36,948 — — 36,948 
Other payments solutions
20,173 — — — 20,173 
Total revenue$77,040 $75,945 $142,794 $190,644 $486,423 
22

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The following tables present revenue disaggregated by geography, based on where items are shipped from or where services are performed:

Quarter Ended March 31, 2021
(in thousands)PaymentsCloud SolutionsPromotional SolutionsChecksConsolidated
United States$68,484 $53,512 $119,148 $169,014 $410,158 
Foreign, primarily Canada and Australia
10,954 8,708 5,359 6,085 31,106 
Total revenue$79,438 $62,220 $124,507 $175,099 $441,264 
Quarter Ended March 31, 2020
(in thousands)PaymentsCloud SolutionsPromotional SolutionsChecksConsolidated
United States$68,358 $68,070 $136,814 $184,294 $457,536 
Foreign, primarily Canada and Australia
8,682 7,875 5,980 6,350 28,887 
Total revenue$77,040 $75,945 $142,794 $190,644 $486,423 


NOTE 15: RISKS AND UNCERTAINTIES

The impact on our business of the COVID-19 pandemic continues to evolve. As such, we are uncertain of the impact on our future financial condition, liquidity and/or results of operations. This uncertainty affected several of the assumptions made and estimates used in the preparation of these consolidated financial statements. As discussed in Note 7, the COVID-19 pandemic resulted in a goodwill impairment triggering event during the first quarter of 2020, as the adverse economic effects of the pandemic materially decreased demand for the products and services we provide to our customers. The extent to which the pandemic will continue to impact our business depends on future developments, including the severity and duration of the pandemic, the timing and effectiveness of vaccines, business and workforce disruptions and the ultimate number of businesses that fail. Our evaluation of asset impairment required us to make assumptions about these future events over the life of the assets being evaluated. This required significant judgment and actual results may differ significantly from our estimates. As a result of the continuing effects of COVID-19, we may be required to record additional goodwill or other asset impairment charges in the future.

We held loans and notes receivable from our Promotional Solutions distributors of $28,886 as of March 31, 2021. These distributors sell our products and services primarily to small businesses, which have been significantly impacted by the COVID-19 pandemic. As of March 31, 2021, our allowance for expected credit losses on these receivables was $3,361, although the majority of this amount was not driven by impacts of the pandemic. We utilized all information known to us in determining this allowance, as well as allowances related to our trade accounts receivable and unbilled receivables. If our assumptions prove to be incorrect, we may be required to record additional bad debt expense in the future. Additionally, uncertainty surrounding the impact of the COVID-19 outbreak could affect estimates we made regarding inventory obsolescence and workers' compensation liabilities and thus, could result in additional expense in the future.


NOTE 16: SUBSEQUENT EVENT

On April 21, 2021, we entered into an Agreement and Plan of Merger under which First American Payment Systems, L.P. (First American), will become our wholly-owned subsidiary. First American is a large-scale payments technology company that provides partners and merchants with comprehensive in-store, online and mobile payment solutions. The aggregate purchase price payable on the closing date is $960,000 in cash, subject to customary adjustments for cash, debt, net working capital, transaction expenses and certain tax benefits.

We expect the acquisition will close during the second quarter of 2021. The transaction is subject to customary closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended. The shareholders of First American have approved the transaction and no further shareholder approvals are required. The merger agreement contains customary representations, warranties and covenants.
23

DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
From the date of the merger agreement until the closing date, First American is, with limited exceptions, required to conduct its business in the ordinary course consistent with past practice and to comply with certain covenants regarding the operation of its business. The representations and warranties of the parties contained in the merger agreement will terminate and be of no further force and effect as of the closing date, except for those covenants that by their terms expressly apply in whole or in part after the closing of the transaction. We have obtained representation and warranty insurance to cover, subject to certain limitations, losses resulting from potential breaches of First American’s representations and warranties made in the merger agreement. Pursuant to the merger agreement, we are entitled to limited indemnification for certain expenses and losses, if any, that may be incurred after the consummation of the transaction that arise out of certain matters, including a Federal Trade Commission investigation initiated in December 2019 seeking information to determine whether certain subsidiaries of First American may have engaged in conduct prohibited by the Federal Trade Commission Act, the Fair Credit Reporting Act or the Duties of Furnishers of Information. As fully set forth in the merger agreement, our rights to indemnification for any such expenses and losses are limited to the amount of an indemnity holdback, which will be our sole recourse for any such losses.

We expect to finance the transaction with a combination of cash on hand and proceeds from new debt. In connection with the merger, we have obtained a $2,200,000 financing commitment from a group of lenders. During the quarter ended March 31, 2021, we recorded related acquisition transaction costs of $2,765, which are included in selling, general and administrative expense on the consolidated statement of comprehensive income. The results of operations for First American will be included in our Payments segment from the date of acquisition.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:

Executive Overview that discusses what we do, our operating results at a high level and our financial outlook for the upcoming year;
Consolidated Results of Operations; Restructuring, Integration and Other Costs; and Segment Results that includes a more detailed discussion of our revenue and expenses;
Cash Flows and Liquidity, Capital Resources and Other Financial Position Information that discusses key aspects of our cash flows, capital structure and financial position;
Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations that discusses our financial commitments; and
Critical Accounting Policies that discusses the policies we believe are most important to understanding the assumptions and judgments underlying our financial statements.

Please note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 (the 2020 Form 10-K) outlines known material risks and important information to consider when evaluating our forward-looking statements and is incorporated into this Item 2 of this report on Form 10-Q as if fully stated herein. The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. When we use the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” “outlook,” "forecast" or similar expressions in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission, in our press releases, investor presentations and in oral statements made by our representatives, they indicate forward-looking statements within the meaning of the Reform Act.

This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). In addition, we discuss free cash flow, net debt, liquidity, adjusted diluted earnings per share (EPS) and consolidated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), all of which are non-GAAP financial measures. We believe that these non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide useful information to assist investors in analyzing our current period operating performance and in assessing our future period operating performance. For this reason, our internal management reporting also includes these financial measures, which should be considered in addition to, and not as superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and therefore, may not result in useful comparisons. The reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Consolidated Results of Operations.


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EXECUTIVE OVERVIEW

COVID-19 impact – The COVID-19 pandemic began to impact our operations late in the first quarter of 2020. Information regarding the impact in 2020, as well as actions we took in response, can be found under the caption "Executive Overview" in Part II, Item 7 of the 2020 Form 10-K.

The impact of the pandemic continued in the first quarter of 2021 and was the main driver of the 9.3% decrease in revenue, as compared to the first quarter of 2020. Within Promotional Solutions, many of our business customers continued to be impacted by their customers' and governmental responses to the pandemic. Demand for promotional products has declined, as many of our customers reduced or stopped virtually all promotional activities while their business activities are limited. The decline in travel and event cancellations also has reduced promotional spending. In Checks, both business and personal check volumes declined as a result of the slowdown in the economy. The impact in Cloud Solutions was driven primarily by a decline in data-driven marketing solutions, as some clients suspended or reduced their marketing campaigns during this period of uncertainty. We did see some recovery in data-driven marketing revenue during the first quarter of 2021, with an increase of 11.3% as compared to the fourth quarter of 2020. This resulted, in part, from the continuation of low interest rates and an improving credit risk environment, which drove increased marketing efforts by our banking and mortgage lending customers.

Despite the continuing challenges of the pandemic, net income improved in the first quarter of 2021, as compared to the first quarter of 2020, and adjusted EBITDA margin was 20.5% for the first quarter of 2021, in line with our annual expectations prior to the pandemic. Cash provided by operating activities increased $13.1 million in the first quarter of 2021, as compared to the first quarter of 2020, and free cash flow increased $5.7 million. Total debt at the end of the quarter remained unchanged from the beginning of the year, and net debt as of March 31, 2021 was the lowest since June 30, 2018. We held cash and cash equivalents of $125.4 million as of March 31, 2021, and liquidity was $427.8 million. Our priority is to maintain our financial strength, while simultaneously continuing our business transformation. We are continuing important systems implementation work and capital projects, including our enterprise resource planning and sales technology implementations. We also continue to pay our regular quarterly dividend of $0.30 per share.

2021 results vs. 2020 – Numerous factors drove the increase in net income for the first quarter of 2021, as compared to the first quarter of 2020. The primary factor was a decrease in asset impairment charges of $90.3 million, as compared to 2020. Other factors that increased net income included:

actions taken to reduce costs in line with reduced revenues and the continuing evaluation of our cost structure, including savings of approximately $2.8 million from the suspension of the 401(k) plan employer matching contribution implemented in response to the COVID-19 pandemic;

a $7.7 million decrease in bad debt expense, primarily driven by allowances recorded in the first quarter of 2020 related to notes receivable from our Promotional Solutions distributors;

revenue growth in certain business lines, including some recovery of data-driven marketing revenue and increased treasury management revenue; and

a $4.4 million decrease in restructuring, integration and other costs.

Partially offsetting these increases in net income were the following factors:

the continuing secular decline in checks and business forms and the 2020 decision to exit certain product lines within Cloud Solutions;

the loss of revenue resulting from the impact of the COVID-19 pandemic;

a $3.1 million increase in share-based compensation expense; and

acquisition transaction costs of $2.8 million in 2021.

Diluted EPS of $0.57 for the first quarter of 2021, as compared to diluted loss per share of $1.45 for the first quarter of 2020, reflects the increase in net income as described in the preceding paragraphs, partially offset by higher average shares outstanding in 2021. Adjusted diluted EPS for the first quarter of 2021 was $1.26, compared to $1.08 for the first quarter of 2020, and excludes the impact of non-cash items or items that we believe are not indicative of ongoing operations. The increase in adjusted EPS for the first quarter of 2021, as compared to the first quarter of 2020, was driven primarily by various cost savings actions across functional areas, as well as the lower bad debt expense and revenue growth in certain business lines. These increases were partially offset by the continuing secular decline in checks and business forms and the impact of the COVID-19
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pandemic. A reconciliation of diluted earnings (loss) per share to adjusted diluted EPS can be found in Consolidated Results of Operations.

Asset impairment charges – Net loss for the first quarter of 2020 included pretax asset impairment charges of $90.3 million, or $1.81 per share. The impairment charges related primarily to the goodwill of our Promotional Solutions and Cloud Solutions Web Hosting reporting units, as well as amortizable intangibles of our Cloud Solutions Web Hosting reporting unit. Further information regarding these impairment charges can be found under the caption "Note 7: Fair Value Measurements" of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report and under the caption "Critical Accounting Policies" in Part II, Item 7 of the 2020 Form 10-K.

"One Deluxe" Strategy

A detailed discussion of our strategy can be found in Part I, Item 1 of the 2020 Form 10-K. We continue to be encouraged by the success to-date of our One Deluxe strategy. We have made significant progress in the integration of our various technology platforms, we have developed an enterprise-class sales organization, we have built a talented management team and we have strengthened our balance sheet. We have also built an organization focused on developing new and improved products. With all of these achievements, we determined that we are ready to augment our business through meaningful acquisitions.

On April 21, 2021, we entered into an Agreement and Plan of Merger under which First American Payment Systems, L.P. (First American), will become our wholly-owned subsidiary. First American is a large-scale payments technology company that provides partners and merchants with comprehensive in-store, online and mobile payment solutions. The aggregate purchase price payable on the closing date is $960.0 million in cash, subject to customary adjustments for cash, debt, net working capital, transaction expenses and certain tax benefits. The transaction provides an end-to-end payments technology platform, which we believe will provide significant leverage to accelerate organic growth. First American generated revenue of approximately $290.0 million during 2020. We expect to finance the transaction with a combination of cash on hand and proceeds from new debt. In connection with the merger, we have obtained a $2.2 billion financing commitment from a group of lenders. We expect the acquisition will close during the second quarter of 2021, pending customary regulatory approvals and closing conditions. The results of operations for First American will be included in our Payments segment from the date of acquisition. Further information regarding this transaction can be found under the caption "Note 16: Subsequent Event" of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.

Outlook for 2021

Our outlook for 2021 does not include the impact of the First American transaction, which we expect to close during the second quarter of 2021. While the overall economic recovery in 2021 remains uncertain, we believe that we will generate sales-driven revenue growth during 2021 in the range of 0% to 2%, primarily driven by the combination of our sales performance and expected steady macroeconomic recovery from the COVID-19 pandemic. We expect to exit the year with revenue growth in the mid-single digits, and we expect that adjusted EBITDA margin for the full year will be between 20% and 21%, at the lower end of our long-term target range. We anticipate that our annual effective tax rate for 2021 will be approximately 25%.

As of March 31, 2021, we held cash and cash equivalents of $125.4 million and $302.3 million was available for borrowing under our revolving credit facility. We anticipate that capital expenditures will be approximately $90.0 million in 2021, as we continue with important transformation work, innovation investments and building future scale across our product categories. We also expect that we will continue to pay our regular quarterly dividend. However, dividends are approved by our board of directors each quarter and thus, are subject to change. We anticipate that net cash generated by operations, along with cash and cash equivalents on hand and availability under our credit facility, will be sufficient to support our operations and debt service requirements for the next 12 months, including costs of the additional debt we expect to incur in conjunction with the merger with First American. We were in compliance with our debt covenants as of March 31, 2021, and we anticipate that we will remain in compliance with our debt covenants throughout the next 12 months.


CONSOLIDATED RESULTS OF OPERATIONS

Consolidated Revenue
 Quarter Ended March 31,
(in thousands)20212020Change
Total revenue$441,264 $486,423 (9.3%)

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The decrease in total revenue for the first quarter of 2021, as compared to the first quarter of 2020, was driven primarily by volume declines resulting from the impact of the COVID-19 pandemic, primarily in our Promotional Solutions, Cloud Solutions and Checks segments, as discussed in Executive Overview. Revenue also continued to be impacted by the secular decline in order volume for checks and business forms. In addition, Cloud Solutions web and hosted solutions revenue declined approximately $6.8 million in the first quarter of 2021 due to our 2020 decision to exit certain product lines. Partially offsetting these revenue declines was an increase in Cloud Solutions data-driven marketing revenue, resulting in part, from the continuation of low interest rates and an improving credit risk environment, which drove increased marketing efforts by our banking and mortgage lending customers. In addition, Payments treasury management revenue increased 4.0% compared to the first quarter of 2020.

Service revenue represented 32.2% of total revenue for the first quarter of 2021 and 32.0% for the first quarter of 2020. We do not manage our business based on product versus service revenue. Instead, we analyze our revenue based on the product and service offerings shown under the caption: "Note 14: Business Segment Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. Our revenue mix by business segment was as follows:
 Quarter Ended
March 31,
20212020
Payments18.0 %15.8 %
Cloud Solutions
14.1 %15.6 %
Promotional Solutions
28.2 %29.4 %
Checks
39.7 %39.2 %
Total revenue100.0 %100.0 %

Consolidated Cost of Revenue
 Quarter Ended March 31,
(in thousands)20212020Change
Total cost of revenue$178,509 $202,049 (11.7%)
Total cost of revenue as a percentage of total revenue
40.5 %41.5 %(1.0) pts.

Cost of revenue consists primarily of raw materials used to manufacture our products, shipping and handling costs, third-party costs for outsourced products and services, payroll and related expenses, information technology costs, depreciation and amortization of assets used in the production process and in support of digital service offerings, and related overhead.

The decrease in total cost of revenue for the first quarter of 2021, as compared to the first quarter of 2020, was primarily attributable to the decrease in revenue volume resulting from the COVID-19 impact. In addition, cost of revenue decreased as a result of the continued secular decline in checks and business forms, as well as the decline in Cloud Solutions web and hosted solutions revenue driven by the 2020 decision to exit certain product lines. Total cost of revenue also benefited from cost reductions and efficiencies in our fulfillment area. Total cost of revenue as a percentage of total revenue decreased in the first quarter of 2021, as compared to the first quarter of 2020, due in large part, to the change in revenue mix driven by the COVID-19 impact and the 2020 decision to exit certain Cloud Solutions product lines.

Consolidated Selling, General & Administrative (SG&A) Expense
 Quarter Ended March 31,
(in thousands)20212020Change
SG&A expense$212,436 $237,204 (10.4%)
SG&A expense as a percentage of total revenue
48.1 %48.8 %(0.7) pts.

The decrease in SG&A expense for the first quarter of 2021, as compared to the first quarter of 2020, was primarily driven by various cost reduction actions and internal value realization initiatives, including advertising expense reductions and other efficiencies in sales, marketing and our corporate support functions. In addition, bad debt expense decreased $7.7 million, primarily due to allowances recorded in the first quarter of 2020 related to notes receivable from our Promotional Solutions distributors. Also, we incurred lower customer referral expenses on the lower order volume resulting from the impact of the COVID-19 pandemic, and SG&A expense decreased approximately $2.8 million from the suspension of the 401(k) plan employer
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matching contribution implemented in response to the COVID-19 pandemic. Partially offsetting these decreases in SG&A expense were $2.8 million of acquisition transaction costs in the first quarter of 2021, a $2.7 million increase in share-based compensation expense and a legal-related benefit of $2.2 million in the first quarter of 2020. Total SG&A expense as a percentage of revenue decreased for the first quarter of 2021, as compared to the first quarter of 2020, as the benefit of cost reductions and the decrease in bad debt expense more than offset the impact of the revenue decline.

Restructuring and Integration Expense
 Quarter Ended March 31,
(in thousands)20212020Change
Restructuring and integration expense
$14,313 $17,654 $(3,341)

We are currently pursuing several initiatives designed to focus our business behind our growth strategy and to increase our efficiency. Further information regarding these costs can be found under Restructuring, Integration and Other Costs.

Asset Impairment Charges
 Quarter Ended March 31,
(in thousands)20212020Change
Asset impairment charges$— $90,330 $(90,330)

We did not record any asset impairment charges during the first quarter of 2021. During the first quarter of 2020, we recorded asset impairment charges of $90.3 million, related primarily to the goodwill of our Promotional Solutions and Cloud Solutions Web Hosting reporting units and amortizable intangibles of our Cloud Solutions Web Hosting reporting unit. Further information regarding these charges can be found under the caption "Note 7: Fair Value Measurements" of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report and under the caption "Critical Accounting Policies" in Part II, Item 7 of the 2020 Form 10-K.

Interest Expense
 Quarter Ended March 31,
(in thousands)20212020Change
Interest expense$4,524 $6,999 (35.4%)
Weighted-average debt outstanding
840,165 923,423 (9.0%)
Weighted-average interest rate2.0 %2.8 %(0.8) pts.

The decrease in interest expense for the first quarter of 2021, as compared to the first quarter of 2020, was primarily driven by our lower weighted-average interest rate, as well as the lower average debt outstanding in 2021.

Income Tax Provision (Benefit)
 Quarter Ended March 31,
(in thousands)20212020Change
Income tax provision (benefit)$9,190 $(3,210)386.3%
Effective income tax rate27.4 %5.1 %22.3 pts.

The increase in our effective tax rate for the first quarter of 2021, as compared to the first quarter of 2020, was driven primarily by the impact of the nondeductible portion of the goodwill impairment charges in the first quarter of 2020, which lowered our 2020 effective income tax rate by 18.8 points. In addition, the tax impact of share-based compensation resulted in a 3.0 point increase in our effective income tax rate, as compared to the first quarter of 2020. Further information regarding our effective income tax rate for the first quarter of 2021, as compared to our 2020 annual effective income tax rate, can be found under the caption: "Note 9: Income Tax Provision (Benefit)" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.

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Net Income (Loss) / Diluted Earnings (Loss) Per Share
 Quarter Ended March 31,
20212020Change
Net income (loss)$24,325 $(60,131)140.5%
Diluted earnings (loss) per share0.57 (1.45)139.3%
Adjusted diluted EPS(1)
1.26 1.08 16.7%

(1) See the following Reconciliation of Non-GAAP Financial Measures section, which illustrates how we calculate adjusted diluted EPS.

The increases in net income, diluted EPS and adjusted diluted EPS for the first quarter of 2021, as compared to the first quarter of 2020, were driven primarily by the factors outlined in Executive Overview - 2021 results vs. 2020.

Adjusted EBITDA
Quarter Ended March 31,
(in thousands)20212020Change
Adjusted EBITDA(1)
$90,505 $83,334 8.6%
Adjusted EBITDA margin20.5 %17.1 %3.4 pts.

(1) See the following Reconciliation of Non-GAAP Financial Measures section, which illustrates how we calculate adjusted EBITDA.

The increase in adjusted EBITDA for the first quarter of 2021, as compared to the first quarter of 2020, was driven primarily by various cost reduction actions and internal value realization initiatives, including advertising expense reductions and other efficiencies in sales, marketing and our corporate support functions. In addition, bad debt expense decreased $7.7 million in the first quarter of 2021, primarily driven by allowances recorded in the first quarter of 2020 related to notes receivable from our Promotional Solutions distributors, and revenue grew in certain business lines, including some recovery of data-driven marketing revenue and increased treasury management revenue. Partially offsetting these increases in adjusted EBITDA were the continuing secular decline in checks and business forms, the impact of the COVID-19 pandemic on revenue volumes and the loss of Cloud Solutions web and hosted services revenue resulting from our 2020 decision to exit certain product lines. Adjusted EBITDA margin increased for the first quarter of 2021, as compared to the first quarter of 2020, as the impact of cost reductions and reduced bad debt expense exceeded the impact of the revenue volume decline.

Reconciliation of Non-GAAP Financial Measures

We have not reconciled adjusted EBITDA outlook guidance for 2021 to the directly comparable GAAP financial measure because we do not provide outlook guidance for net income or the reconciling items between net income and adjusted EBITDA. Because of the substantial uncertainty and variability surrounding certain of these forward-looking reconciling items, including asset impairment charges, restructuring, integration and other costs, and certain legal-related expenses, a reconciliation of the non-GAAP financial measure outlook guidance to the corresponding GAAP measure is not available without unreasonable effort. The probable significance of certain of these reconciling items is high and, based on historical experience, could be material.

Free cash flow – We define free cash flow as net cash provided by operating activities less purchases of capital assets. We believe that free cash flow is an important indicator of cash available for debt service and for shareholders, after making capital investments to maintain or expand our asset base. Free cash flow is limited and not all of our free cash flow is available for discretionary spending, as we may have mandatory debt payments and other cash requirements that must be deducted from our cash available for future use. We believe that the measure of free cash flow provides an additional metric to compare cash generated by operations on a consistent basis and to provide insight into the cash flow available to fund items such as share repurchases, dividends, mandatory and discretionary debt reduction and acquisitions or other strategic investments.

Net cash provided by operating activities reconciles to free cash flow as follows:
 Quarter Ended
March 31,
(in thousands)20212020
Net cash provided by operating activities$39,581 $26,468 
Purchases of capital assets(21,670)(14,269)
Free cash flow$17,911 $12,199 

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Net debt – Management believes that net debt is an important measure to monitor leverage and to evaluate the balance sheet. In calculating net debt, cash and cash equivalents are subtracted from total debt because they could be used to reduce our debt obligations. A limitation associated with using net debt is that it subtracts cash and cash equivalents, and therefore, may imply that management intends to use cash and cash equivalents to reduce outstanding debt. In addition, net debt suggests that our debt obligations are less than the most comparable GAAP measure indicates.
(in thousands)March 31, 2021December 31, 2020
Total debt$840,000 $840,000 
Cash and cash equivalents(125,440)(123,122)
Net debt$714,560 $716,878 

Liquidity – We define liquidity as cash and cash equivalents plus the amount available for borrowing under our revolving credit facility. We consider liquidity to be an important metric for demonstrating the amount of cash that is available or that could be available on short notice. This financial measure is not a substitute for GAAP liquidity measures. Instead, we believe that this measurement enhances investors' understanding of the funds that are currently available.

(in thousands)March 31, 2021December 31, 2020
Cash and cash equivalents$125,440 $123,122 
Amount available for borrowing under revolving credit facility302,342 302,342 
Liquidity$427,782 $425,464 

Adjusted diluted EPS – By excluding the impact of non-cash items or items that we believe are not indicative of current period operating performance, we believe that adjusted diluted EPS provides useful comparable information to assist in analyzing our current period operating performance and in assessing our future operating performance. As such, adjusted diluted EPS is one of the key financial performance metrics we use to assess the operating results and performance of the business and to identify strategies to improve performance. It is reasonable to expect that one or more of the excluded items will occur in future periods, but the amounts recognized may vary significantly.
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Diluted earnings (loss) per share reconciles to adjusted diluted EPS as follows:
 Quarter Ended
March 31,
(in thousands)20212020
Net income (loss)$24,325 $(60,131)
Net income attributable to non-controlling interest(33)— 
Net income (loss) attributable to Deluxe24,292 (60,131)
Asset impairment charges— 90,330 
Acquisition amortization13,193 14,724 
Restructuring, integration and other costs
15,212 19,633 
CEO transition costs— (180)
Share-based compensation expense6,742 3,618 
Acquisition transaction costs2,765 
Certain legal-related benefit— (2,164)
Adjustments, pre-tax37,912 125,970 
Income tax provision impact of pre-tax adjustments(1)
(8,456)(19,175)
Adjustments, net of tax29,456 106,795 
Adjusted net income attributable to Deluxe53,748 46,664 
Income allocated to participating securities(41)(77)
Re-measurement of share-based awards classified as liabilities
— (788)
Adjusted income attributable to Deluxe available to common shareholders
$53,707 $45,799 
Weighted average shares and potential common shares outstanding42,504 42,065 
Adjustment(2)
(32)155 
Adjusted weighted average shares and potential common shares outstanding42,472 42,220 
GAAP diluted earnings (loss) per share$0.57 $(1.45)
Adjustments, net of tax0.69 2.53 
Adjusted diluted EPS$1.26 $1.08 

(1) The tax effect of the pre-tax adjustments considers the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). Generally, this results in a tax impact that approximates the U.S. effective tax rate for each adjustment. However, the tax impact of certain adjustments, such as asset impairment charges and share-based compensation expense, depends on whether the amounts are deductible in the respective tax jurisdictions and the applicable effective tax rate(s) in those jurisdictions.
(2) The total of weighted-average shares and potential common shares outstanding used in the calculations of adjusted diluted EPS differs from the GAAP calculations, due to differences in the amount of dilutive securities in each calculation.

Adjusted EBITDA – We believe that adjusted EBITDA is useful in evaluating our operating performance, as the calculation eliminates the effect of interest expense, income taxes, the accounting effects of capital investments (i.e., depreciation and amortization) and certain items, as presented below, that may vary for companies for reasons unrelated to current period operating performance. In addition, management utilizes adjusted EBITDA to assess the operating results and performance of the business, to perform analytical comparisons and to identify strategies to improve performance. We also believe that an increasing adjusted EBITDA depicts an increase in the value of the company. We do not consider adjusted EBITDA to be a measure of cash flow, as it does not consider certain cash requirements such as interest, income taxes, debt service payments or capital investments.

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Net income (loss) reconciles to adjusted EBITDA as follows:
Quarter Ended
March 31,
(in thousands)20212020
Net income (loss)$24,325 $(60,131)
Pre-tax income attributable to non-controlling interest
(33)— 
Depreciation and amortization expense27,780 28,430 
Interest expense4,524 6,999 
Income tax provision (benefit)9,190 (3,210)
Asset impairment charges— 90,330 
Restructuring, integration and other costs15,212 19,633 
CEO transition costs— (180)
Share-based compensation expense6,742 3,618 
Acquisition transaction costs2,765 
Certain legal-related benefit— (2,164)
Adjusted EBITDA$90,505 $83,334 


RESTRUCTURING, INTEGRATION AND OTHER COSTS

Restructuring and integration expense consists of costs related to the consolidation and migration of certain applications and processes, including our financial and sales management systems. It also includes costs related to the integration of acquired businesses into our systems and processes. These costs primarily consist of information technology consulting, project management services and internal labor, as well as other costs associated with our initiatives, such as training, travel and 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. Further information regarding restructuring and integration expense can be found under the caption "Note 8: Restructuring and Integration Expense" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. In addition to restructuring and integration expense, we also recognized certain business transformation costs during 2020 related to optimizing our business processes in line with our growth strategies.

The majority of the employee reductions included in our restructuring and integration accruals as of March 31, 2021 are expected to be completed in the second quarter of 2021, and we expect most of the related severance payments to be paid by mid-2021. As a result of our employee reductions, we expect to realize cost savings of approximately $35.0 million in SG&A expense and $1.0 million in total cost of revenue in 2021, in comparison to our 2020 results of operations, which represents a portion of the total net cost reductions we expect to realize in 2021.


SEGMENT RESULTS

We operate 4 reportable segments: Payments, Cloud Solutions, Promotional Solutions and Checks. These segments are generally organized by product type and reflect the way we currently manage the company. The financial information presented below for our reportable business segments is consistent with that presented under the caption "Note 14: Business Segment Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report, where information regarding revenue from our various product and service offerings can also be found.

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Payments

Results for our Payments segment were as follows:
 Quarter Ended March 31,
(in thousands)20212020Change
Total revenue$79,438 $77,040 3.1%
Adjusted EBITDA18,329 18,023 1.7%
Adjusted EBITDA margin23.1 %23.4 %(0.3) pts.

The increase in total revenue for the first quarter of 2021, as compared to the first quarter of 2020, was driven by an increase in treasury management revenue of 4.0%, primarily driven by receivables management revenue. This segment continues to demonstrate growth, as revenue increased 1.8% over the fourth quarter of 2020. We expect continued growth in this segment in 2021, as we work on implementing the new clients we signed during 2020 and during the first quarter of 2021.

The increase in adjusted EBITDA for the first quarter of 2021, as compared to the first quarter of 2020, was driven by the revenue increase, partially offset by costs associated with moving work from our Texas location during the winter storms in February 2021 and the mix of hardware sales. Adjusted EBITDA margin decreased for the first quarter of 2021, as compared to the first quarter of 2020, as the cost increases exceeded the benefit of the revenue increase. As we continue to invest in this business, we expect adjusted EBITDA margins to be in the low 20% range through the remainder of the year.

Cloud Solutions

Results for our Cloud Solutions segment were as follows:
 Quarter Ended March 31,
(in thousands)20212020Change
Total revenue$62,220 $75,945 (18.1%)
Adjusted EBITDA17,209 14,920 15.3%
Adjusted EBITDA margin27.7 %19.6 %8.1 pts.

The decrease in total revenue for the first quarter of 2021, as compared to the first quarter of 2020, was driven by the impact of the COVID-19 pandemic, primarily in data-driven marketing solutions, as some clients suspended or reduced their marketing campaigns. Data-driven marketing revenue increased 11.3% from the fourth quarter of 2020, as our customers slowly reactivated their marketing campaigns and the continuation of low interest rates and an improving credit risk environment drove increased marketing efforts by our banking and mortgage lending customers. Web and hosted solutions revenue decreased $8.4 million for the first quarter of 2021, as compared to the first quarter of 2020, $6.8 million of which was due to our 2020 decision to exit certain product lines.

Adjusted EBITDA and adjusted EBITDA margin for the first quarter of 2021 increased compared to the first quarter of 2020, despite the revenue decline, due to various cost reduction actions to bring expenses in line with our post-COVID-19 operating model. In addition, adjusted EBITDA benefited from the timing and type of customer marketing campaigns in each period, as well as lower information technology costs in the first quarter of 2021. We expect the loss of revenue resulting from our 2020 decision to exit certain product lines will continue to impact this segment in 2021, but we anticipate that adjusted EBITDA margin for the year will be in the low-to-mid 20% range.

Promotional Solutions

Results for our Promotional Solutions segment were as follows:
 Quarter Ended March 31,
(in thousands)20212020Change
Total revenue$124,507 $142,794 (12.8%)
Adjusted EBITDA17,714 11,197 58.2%
Adjusted EBITDA margin14.2 %7.8 %6.4 pts.

The decrease in total revenue for the first quarter of 2021, as compared to the first quarter of 2020, continued to be driven primarily by the impact of the COVID-19 pandemic, as our small business and enterprise customers continued to conservatively react to the current economic environment, resulting in decreased demand for marketing and promotional products. The
33


continuing secular decline in business forms and some accessories also negatively impacted revenue. The year-over-year change in revenue improved in the first quarter of 2021, as compared to the fourth quarter of 2020, when revenue declined 16.6% as compared to the prior year.

Adjusted EBITDA and adjusted EBITDA margin for the first quarter of 2021 increased compared to the first quarter of 2020, despite the revenue decline and a $1.9 million increase in obsolete inventory expense. The increases were driven primarily by the benefit of various cost reduction actions and internal value realization initiatives, as well as lower bad debt expense related to notes receivable from distributors. We are anticipating adjusted EBITDA margins throughout 2021 in the low-to-mid teens, as a result of our cost reduction actions, including changes in key distribution relationships.

Checks

Results for our Checks segment were as follows:
 Quarter Ended March 31,
(in thousands)20212020Change
Total revenue$175,099 $190,644 (8.2%)
Adjusted EBITDA83,534 90,712 (7.9%)
Adjusted EBITDA margin47.7 %47.6 %0.1 pts.

The decrease in total revenue for the first quarter of 2021, as compared to the first quarter of 2020, was driven primarily by the continuing secular decline in checks and the impact of the COVID-19 pandemic, which resulted in a decline in business and personal check usage stemming from the slowdown in the economy. We anticipate that the rate of decline will improve as the macroeconomic environment recovers. Early evidence of this recovery is the sequential improvement in the year-over-year revenue decline rate from 10.0% in the fourth quarter of 2020.

The decrease in Adjusted EBITDA for the first quarter of 2021, as compared to the first quarter of 2020, was driven by the revenue decline, partially offset by various cost reduction actions and internal value realization initiatives intended to scale our operating expenses to match anticipated check volumes, as well as lower bad debt expense.


CASH FLOWS AND LIQUIDITY

As of March 31, 2021, we held cash and cash equivalents of $125.4 million, as well as restricted cash and restricted cash equivalents included in funds held for customers of $109.1 million. The following table shows our cash flow activity for the quarters ended March 31, 2021 and 2020, and should be read in conjunction with the consolidated statements of cash flows appearing in Part I, Item 1 of this report.
 Quarter Ended March 31,
(in thousands)20212020Change
Net cash provided by operating activities$39,581 $26,468 $13,113 
Net cash used by investing activities(21,850)(13,915)(7,935)
Net cash (used) provided by financing activities(14,231)211,156 (225,387)
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents
1,606 (12,717)14,323 
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents
$5,106 $210,992 $(205,886)
Free cash flow(1)
$17,911 $12,199 $5,712 

(1) See the Reconciliation of Non-GAAP Financial Measures within the Consolidated Results of Operations section, which defines and illustrates how we calculate free cash flow.

Net cash provided by operating activities increased $13.1 million for the first quarter of 2021, as compared to the first quarter of 2020, driven primarily by the favorable timing of accounts receivable in certain of our businesses, the benefit of cost saving actions and internal value realization initiatives, and an $8.6 million decrease in performance-based compensation payments related to our 2020 performance. These increases in operating cash flow were partially offset by the continuing impact of the COVID-19 pandemic, the continuing secular decline in checks and business forms and increased investments in cloud computing arrangements we are employing throughout the company.

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Included in net cash provided by operating activities were the following operating cash outflows:
 Quarter Ended March 31,
(in thousands)20212020Change
Performance-based compensation payments(1)
$12,180 $20,777 $(8,597)
Prepaid product discount payments9,590 7,321 2,269 
Severance payments5,701 2,703 2,998 
Interest payments4,033 6,705 (2,672)
Income tax payments3,330 4,332 (1,002)

(1) Amounts reflect compensation based on total company performance.

Net cash used by investing activities for the first quarter of 2021 was $7.9 million higher than the first quarter of 2020, driven primarily by increased purchases of capital assets, as we continue to invest in our transformation.

Net cash used by financing activities for the first quarter of 2021 was $225.4 million higher than the first quarter of 2020, due to borrowings on our revolving credit facility during the first quarter of 2020, primarily a draw of $238.0 million in March 2020, at the onset of the COVID-19 pandemic. We repaid these amounts later in 2020. Partially offsetting this increase in cash used by financing activities was the net change in customer funds obligations in each period and a decrease in common share repurchases of $14.0 million. We suspended share repurchases in the second quarter of 2020 to assist in maintaining liquidity during the COVID-19 pandemic.

Significant cash transactions, excluding those related to operating activities, for each period were as follows:
 Quarter Ended March 31,
(in thousands)20212020Change
Net change in debt$— $256,500 $(256,500)
Purchases of capital assets(21,670)(14,269)(7,401)
Payments for common shares repurchased— (14,000)14,000 
Cash dividends paid to shareholders(12,932)(12,714)(218)
Net change in customer funds obligations1,659 (19,407)21,066 

As of March 31, 2021, our foreign subsidiaries held cash and cash equivalents of $99.2 million. Deferred income taxes have not been recognized on unremitted earnings of our foreign subsidiaries, as these amounts are intended to be reinvested indefinitely in the operations of those subsidiaries. If we were to repatriate all of our foreign cash and cash equivalents into the U.S. at one time, we estimate we would incur a foreign withholding tax liability of approximately $5.0 million, notwithstanding any tax planning strategies that might be available.

As of March 31, 2021, $302.3 million was available for borrowing under our $1.15 billion revolving credit facility. We anticipate that net cash generated by operations, along with the cash and cash equivalents on hand and availability on our credit facility, will be sufficient to support our operations and debt service requirements for the next 12 months, including the additional debt we expect to incur in conjunction with the merger with First American. We anticipate that we will continue to pay our regular quarterly dividend. However, dividends are approved by our board of directors each quarter and thus, are subject to change.


CAPITAL RESOURCES

Our total debt was $840.0 million as of March 31, 2021 and December 31, 2020. Further information concerning our outstanding debt can be found under the caption “Note 11: Debt” in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
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Our capital structure for each period was as follows:
 March 31, 2021December 31, 2020 
(in thousands)AmountWeighted-
average interest rate
AmountWeighted-
average interest rate
Change
Fixed interest rate(1)
$200,000 3.3 %$200,000 3.3 %$— 
Floating interest rate640,000 1.2 %640,000 1.6 %— 
Total debt840,000 2.0 %840,000 2.0 %— 
Shareholders’ equity558,819  540,838  17,981 
Total capital$1,398,819  $1,380,838  $17,981 

(1) The fixed interest rate amount represents the amount drawn under our revolving credit facility that is subject to an interest rate swap agreement. The related interest rate includes the fixed rate under the swap of 1.798% plus the credit facility spread due on all amounts outstanding under the credit facility agreement.

In October 2018, our board of directors authorized the repurchase of up to $500.0 million of our common stock. This authorization has no expiration date. No shares were repurchased during the first quarter of 2021 and $287.5 million remained available for repurchase under this authorization as of March 31, 2021. Information regarding changes in shareholders' equity can be found in the consolidated statements of shareholders' equity appearing in Part I, Item 1 of this report.

As of March 31, 2021, the total availability under our revolving credit facility was $1.15 billion. The facility includes an accordion feature allowing us, subject to lender consent, to increase the credit commitment to an aggregate amount not exceeding $1.425 billion. The credit facility matures in March 2023. Our quarterly commitment fee ranges from 0.175% to 0.35%, based on our leverage ratio.

Borrowings under our credit agreement are collateralized by substantially all of our personal and intangible property. The credit agreement governing the credit facility contains customary covenants regarding limits on levels of subsidiary indebtedness and capital expenditures, liens, investments, acquisitions, certain mergers, certain asset sales outside the ordinary course of business, and change in control as defined in the agreement. The agreement also requires us to maintain certain financial ratios, including a maximum leverage ratio of 3.5 and a minimum ratio of consolidated earnings before interest and taxes to consolidated interest expense, as defined in the credit agreement, of 3.0. Additionally, the agreement contains customary representations and warranties and, as a condition to borrowing, requires that all such representations and warranties be true and correct in all material respects on the date of each borrowing, including representations as to no material adverse change in our business, assets, operations or financial condition. We were in compliance with all debt covenants as of March 31, 2021, and we anticipate that we will remain in compliance with our debt covenants throughout the next 12 months.

As of March 31, 2021, amounts were available for borrowing under our revolving credit facility as follows:
(in thousands)Total
available
Revolving credit facility commitment$1,150,000 
Amount drawn on revolving credit facility(840,000)
Outstanding letters of credit(1)
(7,658)
Net available for borrowing as of March 31, 2021$302,342 

(1) We use standby letters of credit to collateralize certain obligations related primarily to our self-insured workers’ compensation claims, as well as claims for environmental matters, as required by certain states. These letters of credit reduce the amount available for borrowing under our revolving credit facility.

As discussed in Executive Overview, we expect to finance the pending merger with First American via a combination of cash on hand and proceeds from new debt. In connection with the merger, we have obtained a $2.2 billion financing commitment from a group of lenders. We expect the acquisition will close during the second quarter of 2021, pending customary regulatory approvals and closing conditions.


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OTHER FINANCIAL POSITION INFORMATION
Information concerning items comprising selected captions on our consolidated balance sheets can be found under the caption "Note 3: Supplemental Balance Sheet and Cash Flow Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.

Prepaid product discounts – Other non-current assets include prepaid product discounts that are recorded upon contract execution and are generally amortized on the straight-line basis as reductions of revenue over the related contract term. Changes in prepaid product discounts during the quarters ended March 31, 2021 and 2020 can be found under the caption "Note 3: Supplemental Balance Sheet and Cash Flow Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. Cash payments for prepaid product discounts were $9.6 million for the first quarter of 2021 and $7.3 million for the first quarter of 2020.

The number of checks being written has been declining, which has contributed to increased competitive pressure when attempting to retain or acquire clients. Both the number of financial institution clients requesting prepaid product discount payments and the amount of the payments has fluctuated from year to year. Although we anticipate that we will selectively continue to make these payments, we cannot quantify future amounts with certainty. The amount paid depends on numerous factors, such as the number and timing of contract executions and renewals, competitors’ actions, overall product discount levels and the structure of up-front product discount payments versus providing higher discount levels throughout the term of the contract.

Liabilities for prepaid product discounts are recorded upon contract execution. These obligations are monitored for each contract and are adjusted as payments are made. Prepaid product discount payments due within the next year are included in accrued liabilities on the consolidated balance sheets. These accruals were $12.6 million as of March 31, 2021 and $14.4 million as of December 31, 2020.


OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND CONTRACTUAL OBLIGATIONS

It is not our general business practice to enter into off-balance sheet arrangements or to guarantee the performance of third parties. In the normal course of business we periodically enter into agreements that incorporate general indemnification language. These indemnifications encompass third-party claims arising from our products and services, including, without limitation, service failures, breach of security, intellectual property rights, governmental regulations and/or employment-related matters. Performance under these indemnities would generally be triggered by our breach of the terms of the contract. In disposing of assets or businesses, we often provide representations, warranties and/or indemnities to cover various risks, including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we do not believe that any liability under these indemnities would have a material adverse effect on our financial position, annual results of operations or annual cash flows. We have recorded liabilities for known indemnifications related to environmental matters. These liabilities were not significant as of March 31, 2021 or December 31, 2020. Further information regarding our liabilities related to self-insurance and litigation can be found under the caption “Note 12: Other Commitments and Contingencies” in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.

We are not engaged in any transactions, arrangements or other relationships with unconsolidated entities or other third parties that are reasonably likely to have a material effect on our liquidity or on our access to, or requirements for, capital resources. We have not established any special purpose entities other than our agreement to form MedPay Exchange LLC (MPX), doing business as Medical Payment Exchange, which delivers payments to healthcare providers from insurance companies and other payers. This entity is a variable interest entity (VIE), as defined in Accounting Standards Codification Topic 810, Consolidation. Further information regarding our accounting for this entity can be found under the caption "Note 1: Significant Accounting Policies" in the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K. We did not enter into any material related party transactions during the first quarter of 2021 or during 2020.

A table of our contractual obligations was provided in the MD&A section of the 2020 Form 10-K. During the first quarter of 2021, we extended a software-as-a-service contract, which increased our contractual obligations by approximately $42.0 million. Of this amount, approximately $25.0 million is payable in 2021 - 2022, with the remainder payable in 2023.


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CRITICAL ACCOUNTING POLICIES

A description of our critical accounting policies was provided in the MD&A section of the 2020 Form 10-K. There were no changes in these policies during the first quarter of 2021.

New accounting pronouncements – Information regarding the accounting pronouncement adopted during the first quarter of 2021 can be found under the caption “Note 2: New Accounting Pronouncements” in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in interest rates primarily as a result of the borrowing activities used to support our capital structure, maintain liquidity and fund business operations. We do not enter into financial instruments for speculative or trading purposes. The nature and amount of debt outstanding can be expected to vary as a result of future business requirements, market conditions and other factors. As of March 31, 2021, our total debt was comprised of $840.0 million drawn under our revolving credit facility at a weighted-average interest rate of 2.0%. The interest rate on the majority of the amount drawn under our revolving credit facility is variable and reflects current market rates. As such, the related carrying amount reported on the consolidated balance sheets approximates fair value. Amounts drawn on our revolving credit facility mature in March 2023.

As part of our interest rate risk management strategy, we entered into an interest rate swap in July 2019, which we designated as a cash flow hedge, to mitigate variability in interest payments on a portion of the amount drawn under our revolving credit facility. The interest rate swap, which terminates in March 2023 when our revolving credit facility matures, effectively converts $200.0 million of variable rate debt to a fixed rate of 1.798%. Changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive loss on the consolidated balance 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 $6.2 million as of March 31, 2021 and $7.2 million as of December 31, 2020 and was included in other non-current liabilities on the consolidated balance sheets.

Based on the daily average amount of outstanding variable rate debt, a one percentage point change in our weighted-average interest rate would have resulted in a $1.6 million change in interest expense for the first quarter of 2021.

We are exposed to changes in foreign currency exchange rates. Investments in, loans and advances to foreign subsidiaries and branches, as well as the operations of these businesses, are denominated in foreign currencies, primarily Canadian and Australian dollars. The effect of exchange rate changes is not expected to have a significant impact on our earnings and cash flows, as our foreign operations represent a relatively small portion of our business. We have not entered into hedges against changes in foreign currency exchange rates.


ITEM 4. CONTROLS AND PROCEDURES

(a)  Disclosure Controls and Procedures – As of the end of the period covered by this report, March 31, 2021 (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

(b) Internal Control Over Financial Reporting – There were no changes in our internal control over financial reporting identified in connection with our evaluation during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We record accruals with respect to identified claims or lawsuits when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable outcomes. Recorded liabilities were not material to our financial position, results of operations or liquidity, and we do not believe that any of the currently identified claims or litigation will materially affect our financial position, results of operations or liquidity upon resolution. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on our financial position, results of operations or liquidity in the period in which the ruling occurs or in future periods.


ITEM 1A. RISK FACTORS

Our risk factors are outlined in Item 1A of the 2020 Form 10-K. There have been no significant changes to these risk factors since we filed the 2020 Form 10-K.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In October 2018, our board of directors authorized the repurchase of up to $500.0 million of our common stock. This authorization has no expiration date. No shares were repurchased during the first quarter of 2021 and $287.5 million remained available for repurchase as of March 31, 2021.

While not considered repurchases of shares, we do at times withhold shares that would otherwise be issued under equity-based awards to cover the withholding taxes due as a result of the exercising or vesting of such awards. During the first quarter of 2021, we withheld 62,328 shares in conjunction with the vesting and exercise of equity-based awards.

 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5. OTHER INFORMATION

None.







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ITEM 6. EXHIBITS

Exhibit NumberDescription
2.1
10.1
10.2
10.3
10.4
10.5
10.6
31.1
31.2
32.1
101.INSXBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
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Exhibit NumberDescription
104Cover page interactive data file (formatted as Inline XBRL and contained in Exhibit 101)
* Denotes compensatory plan or management contract
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 DELUXE CORPORATION
            (Registrant)
  
Date: May 7, 2021/s/ Barry C. McCarthy
 Barry C. McCarthy
President and Chief Executive Officer
(Principal Executive Officer)
  
Date: May 7, 2021/s/ Keith A. Bush
 Keith A. Bush
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
Date: May 7, 2021/s/ Ronald Van Houwelingen
Ronald Van Houwelingen
Vice President, Corporate Controller
(Principal Accounting Officer)
42