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

FORM 10-Q
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________________ to ________________________
 
Commission file number: 1-7945

 

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

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

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

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

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

The number of shares outstanding of registrant’s common stock, par value $1.00 per share, at October 19, 2015 was 49,219,859.

1


PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value)
(Unaudited)
 
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
62,895

 
$
61,541

Trade accounts receivable (net of allowances for uncollectible accounts of $4,690 and $4,335, respectively)
 
100,380

 
113,656

Inventories and supplies
 
42,195

 
39,411

Deferred income taxes
 
9,925

 
10,159

Funds held for customers
 
49,545

 
43,604

Other current assets
 
46,799

 
50,519

Total current assets
 
311,739

 
318,890

Deferred income taxes
 
1,246

 
1,411

Long-term investments (including $2,015 and $2,384 of investments at fair value, respectively)
 
43,774

 
46,451

Property, plant and equipment (net of accumulated depreciation of $345,050 and $348,530, respectively)
 
82,768

 
87,623

Assets held for sale
 
13,970

 
26,819

Intangibles (net of accumulated amortization of $395,360 and $388,308, respectively)
 
227,838

 
207,180

Goodwill
 
883,819

 
868,376

Other non-current assets
 
127,267

 
131,641

Total assets
 
$
1,692,421

 
$
1,688,391

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
77,209

 
$
87,216

Accrued liabilities
 
212,949

 
219,121

Short-term borrowings
 
319,000

 
160,000

Long-term debt due within one year
 
1,049

 
911

Total current liabilities
 
610,207

 
467,248

Long-term debt
 
198,462

 
393,401

Deferred income taxes
 
94,634

 
95,838

Other non-current liabilities
 
69,045

 
84,407

Commitments and contingencies (Notes 11 and 12)
 


 


Shareholders’ equity:
 
 

 
 

Common shares $1 par value (authorized: 500,000 shares; outstanding: 2015 – 49,219; 2014 – 49,742)
 
49,219

 
49,742

Additional paid-in capital
 

 
4,758

Retained earnings
 
715,922

 
629,335

Accumulated other comprehensive loss
 
(45,068
)
 
(36,338
)
Total shareholders’ equity
 
720,073

 
647,497

Total liabilities and shareholders’ equity
 
$
1,692,421

 
$
1,688,391


See Condensed Notes to Unaudited Consolidated Financial Statements

2


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

 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
Product revenue
 
$
361,781

 
$
350,607

 
$
1,075,692

 
$
1,040,734

Service revenue
 
78,035

 
62,597

 
233,616

 
184,835

Total revenue
 
439,816

 
413,204

 
1,309,308

 
1,225,569

Cost of products
 
(132,594
)
 
(125,917
)
 
(384,590
)
 
(363,852
)
Cost of services
 
(26,708
)
 
(24,233
)
 
(83,332
)
 
(77,117
)
Total cost of revenue
 
(159,302
)
 
(150,150
)
 
(467,922
)
 
(440,969
)
Gross profit
 
280,514

 
263,054

 
841,386

 
784,600

Selling, general and administrative expense
 
(189,641
)
 
(175,661
)
 
(575,110
)
 
(527,138
)
Net restructuring charges
 
(1,505
)
 
(4,193
)
 
(2,738
)
 
(8,507
)
Asset impairment charge
 

 
(6,468
)
 

 
(6,468
)
Operating income
 
89,368


76,732

 
263,538

 
242,487

Loss on early debt extinguishment
 

 

 
(8,917
)
 

Interest expense
 
(4,387
)
 
(9,580
)
 
(15,322
)
 
(28,677
)
Other income
 
919

 
321

 
2,174

 
820

Income before income taxes
 
85,900

 
67,473

 
241,473

 
214,630

Income tax provision
 
(28,983
)
 
(23,042
)
 
(82,553
)
 
(72,800
)
Net income
 
$
56,917

 
$
44,431

 
$
158,920

 
$
141,830

Comprehensive income
 
$
52,680

 
$
41,585

 
$
150,190

 
$
140,164

Basic earnings per share
 
1.14

 
0.89

 
3.18

 
2.83

Diluted earnings per share
 
1.13

 
0.88

 
3.16

 
2.80

Cash dividends per share
 
0.30

 
0.30

 
0.90

 
0.85


See Condensed Notes to Unaudited Consolidated Financial Statements


3


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

 
 
Common shares
 
Common shares
par value
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Balance, December 31, 2014
 
49,742

 
$
49,742

 
$
4,758

 
$
629,335

 
$
(36,338
)
 
$
647,497

Net income
 

 

 

 
158,920

 

 
158,920

Cash dividends
 

 

 

 
(44,965
)
 

 
(44,965
)
Common shares issued
 
281

 
281

 
6,609

 

 

 
6,890

Tax impact of share-based awards
 

 

 
1,619

 

 

 
1,619

Common shares repurchased
 
(772
)
 
(772
)
 
(18,856
)
 
(27,368
)
 

 
(46,996
)
Other common shares retired
 
(32
)
 
(32
)
 
(2,037
)
 

 

 
(2,069
)
Fair value of share-based compensation
 

 

 
7,907

 

 

 
7,907

Other comprehensive loss
 

 

 

 

 
(8,730
)
 
(8,730
)
Balance, September 30, 2015
 
49,219

 
$
49,219

 
$

 
$
715,922

 
$
(45,068
)
 
$
720,073



See Condensed Notes to Unaudited Consolidated Financial Statements


4


DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
158,920

 
$
141,830

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

 
 

Depreciation
 
12,006

 
12,700

Amortization of intangibles
 
42,425

 
35,845

Asset impairment charge
 

 
6,468

Amortization of contract acquisition costs
 
14,059

 
13,180

Deferred income taxes
 
(945
)
 
116

Employee share-based compensation expense
 
8,774

 
6,997

Loss on early debt extinguishment
 
8,917

 

Other non-cash items, net
 
1,197

 
7,708

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

 
 

Trade accounts receivable
 
13,970

 
(5,547
)
Inventories and supplies
 
(1,368
)
 
(2,016
)
Other current assets
 
2,377

 
(4,730
)
Non-current assets
 
(560
)
 
(1,860
)
Accounts payable
 
(12,547
)
 
1,598

Contract acquisition payments
 
(9,843
)
 
(9,831
)
Other accrued and non-current liabilities
 
(19,470
)
 
901

Net cash provided by operating activities
 
217,912

 
203,359

Cash flows from investing activities:
 
 

 
 

Purchases of capital assets
 
(29,549
)
 
(29,649
)
Payments for acquisitions, net of cash acquired
 
(50,933
)
 
(12,144
)
Proceeds from company-owned life insurance policies
 
3,973

 
897

Other
 
805

 
462

Net cash used by investing activities
 
(75,704
)
 
(40,434
)
Cash flows from financing activities:
 
 

 
 

Net proceeds (payments) from short-term borrowings
 
159,000

 
(125
)
Payments on long-term debt, including costs of debt reacquisition
 
(207,791
)
 
(820
)
Payments for debt issue costs
 
(136
)
 
(1,085
)
Proceeds from issuing shares under employee plans
 
5,492

 
8,814

Excess tax benefit from share-based employee awards
 
1,816

 
2,581

Payments for common shares repurchased
 
(46,996
)
 
(60,119
)
Cash dividends paid to shareholders
 
(44,965
)
 
(42,631
)
Other
 
(242
)
 

Net cash used by financing activities
 
(133,822
)
 
(93,385
)
Effect of exchange rate change on cash
 
(7,032
)
 
(2,628
)
Net change in cash and cash equivalents
 
1,354

 
66,912

Cash and cash equivalents, beginning of year
 
61,541

 
121,089

Cash and cash equivalents, end of period
 
$
62,895

 
$
188,001


See Condensed Notes to Unaudited Consolidated Financial Statements

5


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


Note 1: Consolidated financial statements

The consolidated balance sheet as of September 30, 2015, the consolidated statements of comprehensive income for the quarters and nine months ended September 30, 2015 and 2014, the consolidated statement of shareholders’ equity for the nine months ended September 30, 2015, and the consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014 are unaudited. The consolidated balance sheet as of December 31, 2014 was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles (GAAP) in the United States of America. In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial statements are included. Adjustments consist only of normal recurring items, except for any discussed in the notes below. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented in accordance with instructions for Form 10-Q, and do not contain certain information included in our annual consolidated financial statements and notes. The consolidated financial statements and notes appearing in this report should be read in conjunction with the consolidated audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”).


Note 2: New accounting pronouncements

Recently adopted accounting pronouncement – In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This standard changes the criteria for determining which disposals should be presented as discontinued operations and modifies the related disclosure requirements. We adopted the new guidance on January 1, 2015, on a prospective basis. As such, this standard is applicable to any new disposals or new classifications of disposal groups as held for sale which occur on or after January 1, 2015. As of September 30, 2015, the adoption of this standard has had no impact on our consolidated financial statements.

Accounting pronouncements not yet adopted – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The new standard provides revenue recognition guidance for any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other accounting standards. The new standard also expands the required financial statement disclosures regarding revenue recognition. The new guidance is effective for us on January 1, 2018. We are currently assessing the impact of this new standard on our consolidated financial statements, as well as the method of transition that we will use in adopting the new standard.

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new standard requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. The new guidance is effective for us on January 1, 2016. We currently have share-based payment awards that fall within the scope of this standard. Our current accounting treatment is in compliance with the new standard, so we expect no impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the consolidated balance sheet as a direct reduction from the carrying amount of the debt liability. The new guidance is effective for us on January 1, 2016. As of September 30, 2015, we had debt issuance costs of $2,364 related to long-term debt and $60 related to a short-term bank loan, which will be reclassified from other non-current assets and other current assets, respectively, upon adoption of this standard. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This new standard adds SEC paragraphs pursuant to the SEC Staff announcement at the June 18, 2015 Emerging Issues Task Force (EITF) meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. Under this guidance, the SEC Staff would not object to presenting such costs as an asset and subsequently amortizing the deferred costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings under the arrangement. As of September 30, 2015, debt issuance costs of $1,489

6


related to our line-of-credit arrangement were included within other current assets in our consolidated balance sheet and are being amortized ratably over the term of the arrangement. Upon the adoption of ASU No. 2015-03 on January 1, 2016, we will continue to include these costs within other current assets and we will continue to amortize them over the term of the arrangement.

In April 2015, the FASB issued ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The new standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If the arrangement does include a software license, the software license element of the arrangement should be accounted for in the same manner as the acquisition of other software licenses. The new guidance is effective for us on January 1, 2016, and we will apply the standard on a prospective basis to all arrangements entered into or materially modified on or after January 1, 2016. We do not expect the application of this standard to have a significant impact on our results of operations or financial position.

In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent). Under the new standard, investments measured at net asset value (NAV) as a practical expedient for fair value are excluded from the fair value hierarchy. As such, they are not assigned a fair value measurement level in financial statement disclosures of fair value. This new standard will impact the disclosures included in our Annual Report on Form 10-K regarding the plan assets of our postretirement benefit plan. The new guidance is effective for us on January 1, 2016 and we will apply the standard retrospectively to all periods presented.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The new standard requires that inventory within the scope of the guidance be measured at the lower of cost or net realizable value. Previously, inventory was measured at the lower of cost or market. The new guidance is effective for us on January 1, 2017 and will be applied prospectively. We do not expect the application of this standard to have a significant impact on our results of operations or financial position.

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. When recording the purchase price allocation for a business combination in the financial statements, an acquirer may record preliminary amounts when measurements are incomplete as of the end of a reporting period. When the required information is received to finalize the purchase price allocation, the preliminary amounts are adjusted. These adjustments are referred to as measurement-period adjustments. The new guidance eliminates the requirement to restate prior period financial statements for measurement-period adjustments. Instead, it requires that the cumulative impact of a measurement-period adjustment be recognized in the reporting period in which the adjustment is identified. The new guidance is effective for us on January 1, 2016 and will be applied prospectively. We do not expect the application of this standard to have a significant impact on our results of operations or financial position.
 

Note 3: Supplemental balance sheet information

Inventories and supplies – Inventories and supplies were comprised of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
Raw materials
 
$
5,773

 
$
5,899

Semi-finished goods
 
8,987

 
8,990

Finished goods
 
24,192

 
21,298

Supplies
 
3,243

 
3,224

Inventories and supplies
 
$
42,195

 
$
39,411



7


Available-for-sale securities – Available-for-sale securities included within funds held for customers and other current assets were comprised of the following:
 
 
September 30, 2015
(in thousands)
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Canadian and provincial government securities
 
$
8,213

 
$

 
$
(129
)
 
$
8,084

Canadian guaranteed investment certificates
 
7,511

 

 

 
7,511

Available-for-sale securities (funds held for customers)(1)
 
15,724

 

 
(129
)
 
15,595

Canadian money market fund (other current assets)
 
1,675

 

 

 
1,675

Available-for-sale securities
 
$
17,399

 
$


$
(129
)

$
17,270


(1) Funds held for customers, as reported on the consolidated balance sheet as of September 30, 2015, also included cash of $33,950.
 
 
December 31, 2014
(in thousands)
 
Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
Canadian and provincial government securities
 
$
9,245

 
$

 
$
(120
)
 
$
9,125

Canadian guaranteed investment certificates
 
8,605

 

 

 
8,605

Available-for-sale securities (funds held for customers)(1)
 
17,850




(120
)

17,730

Canadian money market fund (other current assets)
 
1,895

 

 

 
1,895

Available-for-sale securities
 
$
19,745

 
$

 
$
(120
)
 
$
19,625

 
(1) Funds held for customers, as reported on the consolidated balance sheet as of December 31, 2014, also included cash of $25,874.
 
Expected maturities of available-for-sale securities as of September 30, 2015 were as follows:
(in thousands)
 
Fair value
Due in one year or less
 
$
10,657

Due in two to five years
 
4,139

Due in six to ten years
 
2,474

Available-for-sale securities
 
$
17,270


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

Assets held for sale – Assets held for sale as of December 31, 2014 included the operations of five small business distributors which we previously acquired. The distributors were included in the Small Business Services segment and the assets acquired consisted primarily of customer list intangible assets. During the nine months ended September 30, 2015, we sold the operations of four of these distributors in exchange for notes receivable, realizing an immaterial net pre-tax gain. The distributors that purchased these businesses from us remain part of our Safeguard® distributor network. We are actively marketing the remaining distributor and expect the selling price will exceed its carrying value. Net assets held for sale consisted of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
 
Balance sheet caption
Current assets
 
$
128

 
$
687

 
Other current assets
Intangibles
 
13,533

 
25,926

 
Assets held for sale
Other non-current assets
 
437

 
893

 
Assets held for sale
Accrued liabilities
 
(228
)
 
(1,058
)
 
Accrued liabilities
Non-current deferred income tax liabilities
 
(5,706
)
 
(8,774
)
 
Other non-current liabilities
Net assets held for sale
 
$
8,164

 
$
17,674

 
 

8



Intangibles – Intangibles were comprised of the following:
 
 
September 30, 2015
 
December 31, 2014
(in thousands)
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
Indefinite-lived:
 
 
 
 
 
 
 
 
 
 
 
 
Trade name
 
$
19,100

 
$

 
$
19,100

 
$
19,100

 
$

 
$
19,100

Amortizable intangibles:
 
 

 
 

 
 

 
 

 
 

 
 

Internal-use software
 
364,243

 
(302,072
)
 
62,171

 
364,229

 
(303,340
)
 
60,889

Customer lists/relationships
 
140,216

 
(48,958
)
 
91,258

 
106,218

 
(40,097
)
 
66,121

Trade names
 
63,981

 
(35,184
)
 
28,797

 
69,281

 
(37,623
)
 
31,658

Software to be sold
 
28,500

 
(2,974
)
 
25,526

 
28,500

 
(601
)
 
27,899

Other
 
7,158

 
(6,172
)
 
986

 
8,160

 
(6,647
)
 
1,513

Amortizable intangibles
 
604,098

 
(395,360
)

208,738


576,388


(388,308
)

188,080

Intangibles
 
$
623,198

 
$
(395,360
)

$
227,838


$
595,488


$
(388,308
)

$
207,180


Amortization of intangibles was $14,686 for the quarter ended September 30, 2015 and $11,730 for the quarter ended September 30, 2014. Amortization of intangibles was $42,425 for the nine months ended September 30, 2015 and $35,845 for the nine months ended September 30, 2014. Based on the intangibles in service as of September 30, 2015, estimated future amortization expense is as follows:
(in thousands)
 
Estimated
amortization
expense
Remainder of 2015
 
$
13,405

2016
 
46,165

2017
 
33,407

2018
 
22,225

2019
 
17,192


During the nine months ended September 30, 2015, we acquired internal-use software in the normal course of business. We also acquired internal-use software and other intangible assets in conjunction with acquisitions (Note 6). The following intangible assets were acquired during the nine months ended September 30, 2015:
(in thousands)
 
Amount
 
Weighted-average amortization period
(in years)
Internal-use software
 
$
24,984

 
4
Customer lists/relationships
 
38,005

 
7
Trade name
 
400

 
2
Acquired intangibles
 
$
63,389

 
6

9



Goodwill – Changes in goodwill during the nine months ended September 30, 2015 were as follows:
(in thousands)
 
Small
Business
Services
 
Financial
Services
 
Direct
Checks
 
Total
Balance, December 31, 2014:
 
 
 
 
 
 
 
 
Goodwill, gross
 
$
654,007

 
$
85,863

 
$
148,506

 
$
888,376

Accumulated impairment charges
 
(20,000
)
 

 

 
(20,000
)
Goodwill, net of accumulated impairment charges
 
634,007

 
85,863


148,506


868,376

Adjustment for acquisition of Wausau Financial Systems, Inc. (Note 6)
 

 
(714
)
 

 
(714
)
Acquisition of Verify Valid (Note 6)
 
5,650

 

 

 
5,650

Acquisition of small business distributor (Note 6)
 
9,276

 

 

 
9,276

Acquisition of Tech Assets (Note 6)
 
1,450

 

 

 
1,450

Currency translation adjustment
 
(219
)
 

 

 
(219
)
Balance, September 30, 2015:
 
 

 
 

 
 

 
 

Goodwill, gross
 
670,164

 
85,149

 
148,506

 
903,819

Accumulated impairment charges
 
(20,000
)
 

 

 
(20,000
)
Goodwill, net of accumulated impairment charges
 
$
650,164

 
$
85,149


$
148,506


$
883,819


Other non-current assets – Other non-current assets were comprised of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
Contract acquisition costs
 
$
61,412

 
$
74,101

Postretirement benefit plan asset
 
27,607

 
24,243

Loans and notes receivable from distributors
 
23,736

 
14,583

Deferred advertising costs
 
6,858

 
8,922

Other
 
7,654

 
9,792

Other non-current assets
 
$
127,267

 
$
131,641


Changes in contract acquisition costs during the nine months ended September 30, 2015 and 2014 were as follows:
 
 
Nine Months Ended
September 30,
(in thousands)
 
2015
 
2014
Balance, beginning of year
 
$
74,101

 
$
35,421

Additions(1)
 
4,828

 
55,659

Amortization
 
(14,059
)
 
(13,180
)
Other
 
(3,458
)
 
(330
)
Balance, end of period
 
$
61,412

 
$
77,570

 
(1) Contract acquisition costs are accrued upon contract execution. Cash payments made for contract acquisition costs were $9,843 for the nine months ended September 30, 2015 and $9,831 for the nine months ended September 30, 2014.


10


Accrued liabilities – Accrued liabilities were comprised of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
Funds held for customers
 
$
48,596

 
$
42,944

Deferred revenue
 
35,888

 
48,514

Performance-based compensation
 
30,613

 
38,259

Customer rebates
 
19,179

 
20,550

Contract acquisition costs due within one year
 
8,411

 
9,815

Restructuring due within one year (Note 9)
 
2,429

 
4,276

Other
 
67,833

 
54,763

Accrued liabilities
 
$
212,949

 
$
219,121



Note 4: Earnings per share

The following table reflects the calculation of basic and diluted earnings per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted earnings per share because their effect would have been antidilutive. 
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
(dollars and shares in thousands, except per share amounts)
 
2015
 
2014
 
2015
 
2014
Earnings per share – basic:
 
 
 
 
 
 
 
 
Net income
 
$
56,917

 
$
44,431

 
$
158,920

 
$
141,830

Income allocated to participating securities
 
(386
)
 
(256
)
 
(1,054
)
 
(743
)
Income available to common shareholders
 
$
56,531

 
$
44,175


$
157,866

 
$
141,087

Weighted-average shares outstanding
 
49,396

 
49,594

 
49,592

 
49,889

Earnings per share – basic
 
$
1.14

 
$
0.89

 
$
3.18

 
$
2.83

 
 
 
 
 
 
 
 
 
Earnings per share – diluted:
 
 

 
 

 
 
 
 
Net income
 
$
56,917

 
$
44,431

 
$
158,920

 
$
141,830

Income allocated to participating securities
 
(384
)
 
(255
)
 
(1,049
)
 
(738
)
Re-measurement of share-based awards classified as liabilities
 
(114
)
 
(66
)
 
(67
)
 
43

Income available to common shareholders
 
$
56,419

 
$
44,110


$
157,804

 
$
141,135

Weighted-average shares outstanding
 
49,396

 
49,594

 
49,592

 
49,889

Dilutive impact of potential common shares
 
366

 
448

 
391

 
448

Weighted-average shares and potential common shares outstanding
 
49,762

 
50,042


49,983

 
50,337

Earnings per share – diluted
 
$
1.13

 
$
0.88

 
$
3.16

 
$
2.80

Antidilutive options excluded from calculation
 
255

 
276

 
255

 
276





11


Note 5: Other comprehensive income

Reclassification adjustments Information regarding amounts reclassified from accumulated other comprehensive loss to net income was as follows:
Accumulated other comprehensive loss components
 
Amounts reclassified from accumulated other comprehensive loss
 
Affected line item in consolidated statements of comprehensive income
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
 
(in thousands)
 
2015
 
2014
 
2015
 
2014
 
 
Amortization of loss on interest rate locks(1)
 
$

 
$
(427
)
 
$

 
$
(1,282
)
 
Interest expense
Tax benefit
 

 
167

 

 
501

 
Income tax provision
Amortization of loss on interest rate locks, net of tax
 

 
(260
)
 

 
(781
)
 
Net income
Amortization of postretirement benefit plan items:
 
 
 
 
 
 
 
 
 
 
Prior service credit
 
355

 
355

 
1,066

 
1,066

 
(2) 
Net actuarial loss
 
(780
)
 
(854
)
 
(2,340
)
 
(2,563
)
 
(2) 
Total amortization
 
(425
)
 
(499
)
 
(1,274
)
 
(1,497
)
 
(2) 
Tax benefit
 
113

 
139

 
339

 
418

 
(2) 
Amortization of postretirement benefit plan items, net of tax
 
(312
)
 
(360
)
 
(935
)
 
(1,079
)
 
(2) 
Total reclassifications, net of tax
 
$
(312
)
 
$
(620
)
 
$
(935
)
 
$
(1,860
)
 
 

(1) Relates to interest rate locks which terminated in October 2014 in conjunction with the maturity of the related debt. See the caption "Note 6: Derivative financial instruments" in the Notes to Consolidated Financial Statements appearing in the 2014 Form 10-K.
(2) Amortization of postretirement benefit plan items is included in the computation of net periodic benefit income. Additional details can be found in Note 10: Postretirement benefits.

Accumulated other comprehensive loss Changes in the components of accumulated other comprehensive loss were as follows:
(in thousands)
 
Postretirement benefit plans, net of tax
 
Net unrealized loss on marketable securities,
net of tax(1)
 
Currency translation adjustment
 
Accumulated other comprehensive loss
Balance, December 31, 2014
 
$
(32,405
)
 
$
(125
)
 
$
(3,808
)
 
$
(36,338
)
Other comprehensive loss before reclassifications
 

 
(14
)
 
(9,651
)
 
(9,665
)
Amounts reclassified from accumulated other comprehensive loss
 
935

 

 

 
935

Net current-period other comprehensive income (loss)
 
935

 
(14
)
 
(9,651
)
 
(8,730
)
Balance, September 30, 2015
 
$
(31,470
)
 
$
(139
)
 
$
(13,459
)
 
$
(45,068
)

(1) Other comprehensive loss before reclassifications is net of an income tax benefit of $5.



12


Note 6: Acquisitions

We periodically complete business combinations that align with our business strategy. The assets and liabilities acquired were recorded at their estimated fair values and the results of operations of each acquired business were included in our consolidated statements of comprehensive income from their acquisition dates. Transaction costs related to the acquisitions were expensed as incurred and were not significant to the consolidated statements of comprehensive income for the quarter or nine months ended September 30, 2015. During the nine months ended September 30, 2015, we completed the following acquisitions:
In January 2015, we acquired selected assets of Range, Inc., a marketing services provider. The results of this business are included in our Small Business Services segment.
In February 2015, we acquired selected assets of Verify Valid LLC, a provider of electronic check payment services. The results of this business are included in our Small Business Services segment. The allocation of the purchase price based upon the estimated fair values of the assets acquired and liabilities assumed resulted in tax-deductible goodwill of $5,650. This acquisition resulted in goodwill as the acquired technology enables us to diversify our payment product and service offerings and bring these offerings to our customer base.
In August 2015, we acquired selected assets of Tech Assets, Inc., a provider of shared hosting websites to small businesses using cPanel web hosting technology. The results of this business are included in our Small Business Services segment. We expect to finalize the allocation of the purchase price by the end of 2015 when our valuation of intangibles and their useful lives is completed. The preliminary allocation of the purchase price based upon the estimated fair values of the assets acquired and liabilities assumed resulted in tax-deductible goodwill of $1,450. This acquisition resulted in goodwill as we expect to accelerate revenue growth by combining our capabilities with Tech Asset's tools and hosting technology.
In September 2015, we acquired selected assets of FMC Resource Management Corporation, a marketing services provider. The results of this business are included in our Small Business Services segment. We expect to finalize the allocation of the purchase price by the end of 2015 when our valuation of all of the acquired assets and liabilities is finalized.
During the nine months ended September 30, 2015, we acquired the operations of eight small business distributors. The results of six of these businesses are included within our Small Business Services segment. The results of the two remaining distributors are included in our Financial Services segment, as their customers consist primarily of financial institutions. The allocation of the purchase price to the acquired assets and liabilities is preliminary for certain of these distributors. It is expected to be finalized by the end of 2015 when our valuation of certain assets and liabilities is finalized, including, but not limited to, intangibles and deferred income taxes. The allocation of the purchase price based upon the estimated fair values of the assets acquired and liabilities assumed resulted in tax-deductible goodwill of $9,276 related to one of the Small Business Services distributors. This is an increase of $230 from the preliminary amount recorded as of June 30, 2015. This acquisition resulted in goodwill as we expect to accelerate revenue growth in business and marketing communications solutions by adding an established customer base which gives us a larger presence in the western United States.


13


As these acquisitions were immaterial to our operating results both individually and in the aggregate, pro forma results of operations are not provided. The following illustrates the preliminary allocation of the aggregate purchase price for the above acquisitions to the assets acquired and liabilities assumed, reduced for any cash or cash equivalents acquired with the acquisitions:
(in thousands)
 
September 30, 2015
Net tangible assets acquired and liabilities assumed
 
$
2,260

Identifiable intangible assets:
 
 
Customer lists
 
38,005

Internal-use software
 
2,902

Trade name
 
400

Total intangible assets
 
41,307

Goodwill
 
16,376

Total aggregate purchase price
 
59,943

Liabilities for holdback payments and contingent consideration(1)
 
(7,304
)
Non-cash consideration(2)
 
(5,843
)
Net cash paid for 2015 acquisitions
 
46,796

Holdback payments for prior year acquisitions
 
4,137

Payments for acquisitions, net of cash acquired
 
$
50,933


(1) Consists of holdback payments due at a future date and liabilities for contingent consideration related primarily to the acquisitions of Verify Valid and a small business distributor. Further information regarding the contingent consideration liabilities can be found in Note 8.

(2) Consists of pre-acquisition amounts owed to us by certain of the acquired businesses.

Further information regarding the calculation of the estimated fair values of the intangibles acquired and the liabilities for contingent consideration can be found in Note 8.
In October 2014, we acquired all of the outstanding capital stock of Wausau Financial Systems, Inc. (Wausau), a provider of software-based solutions for receivables management, lockbox processing, remote deposit capture and paperless branch solutions to financial institutions, utilities, government agencies and telecommunications companies. The results of this business are included in our Financial Services segment. During the nine months ended September 30, 2015, we finalized the valuation of the assets acquired and liabilities assumed. We decreased goodwill $714 from the preliminary amount recorded as of December 31, 2014, with the offset to certain income and sales tax accounts. This acquisition resulted in goodwill as Wausau provides new access into the commercial and treasury side of financial institutions through a strong software-as-a-service (SaaS) technology offering.


Note 7: Derivative financial instruments

We have entered into interest rate swaps to hedge against changes in the fair value of our long-term debt. At the time we entered into these swaps, which we designated as fair value hedges, we were targeting a mix of fixed and variable rate debt, where we receive a fixed rate and pay a variable rate based on the London Interbank Offered Rate (LIBOR). The interest rate swaps related to our long-term debt due in 2020 have a notional amount of $200,000 and meet the criteria for using the short-cut method for a fair value hedge based on the structure of the hedging relationship. As such, changes in the fair value of the derivatives and the related long-term debt are equal. The fair value of these interest rate swaps was included in other non-current liabilities in the consolidated balance sheets and was $2,816 as of September 30, 2015 and $8,067 as of December 31, 2014. As the short-cut method is being used to account for these hedges, the decrease in long-term debt due to fair value adjustments was also $2,816 as of September 30, 2015 and $8,067 as of December 31, 2014.

During the nine months ended September 30, 2014, we also held interest rate swaps related to our long-term debt which matured in October 2014. The short-cut method was not used for these interest rate swaps. As such, changes in the fair value of the interest rate swaps and the related long-term debt were not equal (i.e., hedge ineffectiveness) and were included in interest expense in the consolidated statement of comprehensive income. Information regarding hedge ineffectiveness during the quarter and nine months ended September 30, 2014 is presented in Note 8.


14



Note 8: Fair value measurements

Annual asset impairment analyses – We evaluate the carrying value of goodwill and our indefinite-lived trade name as of July 31 of each year and between annual evaluations if events occur or circumstances change that would indicate a possible impairment. Our policy on impairment of indefinite-lived intangibles and goodwill, which is included under the caption "Note 1: Significant accounting policies" in the Notes to Consolidated Financial Statements appearing in the 2014 Form 10-K, provides further information regarding our methodology for assessing impairment of these assets. In completing the 2015 annual goodwill impairment analysis, we elected to perform a qualitative assessment for all of our reporting units to which goodwill is assigned, with the exception of our Financial Services Commercial reporting unit which was acquired subsequent to our 2014 annual impairment analysis. Our qualitative analysis evaluated factors including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the quantitative analysis we completed as of July 31, 2014 in which the estimated fair values of our reporting units' net assets exceeded their carrying values by approximate amounts between $74,000 and $1,128,000, or by amounts between 47% and 482% above the carrying values of their net assets. In completing our 2015 qualitative analysis, we noted no changes in events or circumstances which would have required us to complete the two-step quantitative goodwill impairment analysis for any of the reporting units analyzed. In addition, the quantitative analysis completed for our Financial Services Commercial reporting unit indicated that its fair value exceeded its carrying value by approximately 13%. Total goodwill for this reporting unit was approximately $45,000 as of September 30, 2015. In completing the 2015 annual impairment analysis of our indefinite-lived trade name, we elected to perform a quantitative assessment which indicated that the calculated fair value of the asset exceeded its carrying value of $19,100 by approximately $20,000 as of July 31, 2015. As such, we recorded no impairment charges as a result of our 2015 annual impairment analyses.

Non-recurring asset impairment analysis – During the third quarter of 2014, we performed an impairment analysis related to our Small Business Services search engine marketing and optimization business. Revenue and the related cash flows from this business had been lower than previously projected, and as a result of our annual planning process completed during the third quarter of 2014, we decided to reduce the revenue base of this business in order to improve its financial performance. As such, we revised our estimates of future revenues and cash flows to reflect these decisions during the third quarter of 2014. We calculated the estimated fair values of the assets as the net present value of estimated future cash flows (level 3 fair value measurement). Our analysis resulted in an impairment charge of $6,468 during the quarter ended September 30, 2014, which reflects writing down the net book value of the related intangible assets to zero. Information regarding the composition of the asset impairment charge was as follows:
(in thousands)
 
Asset impairment charge
Internal-use software
 
$
4,036

Customer relationships
 
1,952

Trade name
 
480

Total impairment charge
 
$
6,468


2015 acquisitions – For all acquisitions, we are required to measure the fair value of the net identifiable tangible and intangible assets and liabilities acquired, excluding goodwill and deferred income taxes. Information regarding the acquisitions completed during the nine months ended September 30, 2015 can be found in Note 6. The identifiable net assets acquired during the nine months ended September 30, 2015 were comprised primarily of customer lists associated with the acquisitions of small business distributors, as well as Range, Tech Assets and FMC. We also acquired internal-use software associated with the acquisitions of Verify Valid and a small business distributor. The aggregate fair value of the acquired customer lists was $38,005 and was estimated by discounting the estimated cash flows expected to be generated by the assets. Assumptions used in the calculations included same-customer revenue growth rates and estimated customer retention rates based on the acquirees' historical information. The fair value of the acquired internal-use software was $2,902 and was estimated using the cost of reproduction method. The primary components of the software were identified and the estimated cost to reproduce the software was calculated based on data provided by acquirees. Information regarding the useful lives of the acquired intangibles can be found in Note 3.

Liabilities for contingent consideration related to the acquisitions completed during the nine months ended September 30, 2015, related primarily to the acquisitions of Verify Valid and a small business distributor. Under the Verify Valid purchase agreement, we are required to make annual contingent payments over a period of up to eight years, based on the revenue generated by the business. A specified payment percentage for each year is applied to the revenue generated by the

15


business in that year to determine the amount of the payment. There is no maximum amount of contingent payments specified in the agreement. Under the small business distributor purchase agreement, we are required to make annual contingent payments over a period of up to three years, based on the gross profit generated by the business. A specified payment percentage for each year is applied to the gross profit generated by the business in that year to determine the amount of the payment. The maximum contingent payment in any year of the agreement is $925. The fair value of the liabilities for contingent payments recognized upon acquisition was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in the calculation included the discount rate, projected revenue or gross profit based on our most recent internal forecast, and factors indicating the probability of achieving the forecasted revenue or gross profit. The liabilities are re-measured each reporting period. Increases or decreases in projected revenue or gross profit and the related probabilities may result in a higher or lower fair value measurement. Changes in fair value resulting from changes in the timing, amount of, or likelihood of contingent payments are included in selling, general and administrative (SG&A) expense in the consolidated statements of comprehensive income. Changes in fair value resulting from accretion for the passage of time are included in interest expense in the consolidated statements of comprehensive income.

Recurring fair value measurements – Funds held for customers included available-for-sale marketable securities (Note 3). These securities consisted of a mutual fund investment which invests in Canadian and provincial government securities and investments in Canadian guaranteed investment certificates (GIC's) with maturities of one year or less. The mutual fund is not traded in an active market and its fair value is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. The fair value of the GIC's approximated cost due to their relatively short duration. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss in the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue in the consolidated statements of comprehensive income and were not significant for the quarters or nine months ended September 30, 2015 and 2014.

Other current assets included available-for-sale marketable securities (Note 3). These securities consisted of a Canadian money market fund which is not traded in an active market. As such, the fair value of this investment is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. Because of the short-term nature of the underlying investments, the cost of these securities approximates their fair value. The cost of securities sold is determined using the average cost method. No gains or losses on sales of these marketable securities were realized during the quarters or nine months ended September 30, 2015 and 2014.

We have elected to account for a long-term investment in domestic mutual funds under the fair value option for financial assets and financial liabilities. The fair value option provides companies an irrevocable option to measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings. The investment is included in long-term investments in the consolidated balance sheets. Long-term investments also include the cash surrender values of company-owned life insurance policies. Realized and unrealized gains and losses, as well as dividends earned by the mutual fund investment, are included in SG&A expense in the consolidated statements of comprehensive income. This investment corresponds to a liability under an officers’ deferred compensation plan which is not available to new participants and is fully funded by the investment in mutual funds. The liability under the plan equals the fair value of the investment in mutual funds. Thus, as the value of the investment changes, the value of the liability changes accordingly. As changes in the liability are reflected within SG&A expense in the consolidated statements of comprehensive income, the fair value option of accounting for the investment in mutual funds allows us to net changes in the investment and the related liability in the statements of comprehensive income. The cost of securities sold is determined using the average cost method. During the nine months ended September 30, 2015 and 2014, net realized gains were not significant, and net unrealized losses were not significant during the nine months ended September 30, 2014. We recognized net unrealized losses of $333 during the nine months ended September 30, 2015.

The fair value of interest rate swaps (Note 7) is determined at each reporting date by means of a pricing model utilizing readily observable market interest rates. The change in fair value is determined as the change in the present value of estimated future cash flows discounted using the LIBOR rate. The interest rate swaps related to our long-term debt due in 2020 meet the criteria for using the short-cut method for a fair value hedge based on the structure of the hedging relationship. As such, the changes in the fair value of the derivative and related long-term debt are equal. The short-cut method was not used for our other interest rate swaps which terminated with the maturity of the related long-term debt in October 2014.


16


Changes in the fair value of the interest rate swaps, as well as changes in the fair value of the hedged debt, are included in interest expense in the consolidated statements of comprehensive income and were as follows:
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
 
2015
 
2014
 
2015
 
2014
Gain (loss) from derivatives
 
$
3,761

 
$
(1,292
)
 
$
5,251

 
$
3,646

(Loss) gain from change in fair value of hedged debt
 
(3,761
)
 
1,334

 
(5,251
)
 
(3,496
)
Net decrease in interest expense
 
$

 
$
42

 
$


$
150


Information regarding recurring fair value measurements completed during each period was as follows:
 
 
 
 
Fair value measurements using
 
 
Fair value as of
 September 30, 2015
 
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
(in thousands)
 
 
(Level 1)
 
 (Level 2)
 
(Level 3)
Available-for-sale marketable securities (funds held for customers)
 
$
15,595

 
$

 
$
15,595

 
$

Available-for-sale marketable securities (other current assets)
 
1,675

 

 
1,675

 

Long-term investment in mutual funds
 
2,015

 
2,015

 

 

Derivative liabilities
 
(2,816
)
 

 
(2,816
)
 

Accrued contingent consideration
 
(6,025
)
 

 

 
(6,025
)
 
 
 
 
Fair value measurements using
 
 
Fair value as of
December 31, 2014
 
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
(in thousands)
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Available-for-sale marketable securities (funds held for customers)
 
$
17,730

 
$

 
$
17,730

 
$

Available-for-sale marketable securities (other current assets)
 
1,895

 

 
1,895

 

Long-term investment in mutual funds
 
2,384

 
2,384

 

 

Derivative liabilities
 
(8,067
)
 

 
(8,067
)
 


Our policy is to recognize transfers between fair value levels as of the end of the reporting period in which the transfer occurred. There were no transfers between fair value levels during the nine months ended September 30, 2015.

Accrued contingent consideration related primarily to the acquisitions of Verify Valid and a small business distributor, as discussed above under the caption 2015 acquisitions. Changes in accrued contingent consideration during the nine months ended September 30, 2015 were as follows:
(in thousands)
 
Nine Months Ended
September 30, 2015
Balance, December 31, 2014
 
$
150

Acquisition date fair value
 
5,575

Accretion
 
542

Payments
 
(242
)
Balance, September 30, 2015
 
$
6,025


Fair value measurements of other financial instruments – The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate fair value.

17



Cash, short-term borrowings, and cash included within funds held for customers – The carrying amounts reported in the consolidated balance sheets approximate fair value because of the short-term nature of these items.

Loans and notes receivable from distributors – We have receivables for loans made to certain of our Safeguard distributors. In addition, we have acquired the operations of several small business distributors which we then sold to our Safeguard distributors. In most cases, we entered into notes receivable upon the sale of the assets to the distributors. The fair value of these loans and notes receivable is calculated as the present value of expected future cash flows, discounted using an estimated interest rate based on published bond yields for companies of similar risk.

Long-term debt – The fair value of long-term debt is based on significant observable market inputs other than quoted prices in active markets. The fair value of long-term debt included in the table below does not reflect the impact of hedging activity. The carrying amount of long-term debt includes the change in fair value of hedged long-term debt.

The estimated fair values of these financial instruments were as follows:
 
 
 
 
Fair value measurements using
 
 
September 30, 2015
 
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
(in thousands)
 
Carrying value
 
Fair value
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash
 
$
62,895

 
$
62,895

 
$
62,895

 
$

 
$

Cash (funds held for customers)
 
33,950

 
33,950

 
33,950

 

 

Loans and notes receivable from distributors
 
25,981

 
23,510

 

 

 
23,510

Short-term borrowings
 
319,000

 
319,000

 
319,000

 

 

Long-term debt(1)
 
197,184

 
210,200

 

 
210,200

 


(1) Amounts exclude capital lease obligations.
 
 
 
 
Fair value measurements using
 
 
December 31, 2014
 
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
(in thousands)
 
Carrying value
 
Fair value
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash
 
$
61,541

 
$
61,541

 
$
61,541

 
$

 
$

Cash (funds held for customers)
 
25,874

 
25,874

 
25,874

 

 

Loans and notes receivable from distributors
 
16,915

 
15,765

 

 

 
15,765

Short-term borrowings
 
160,000

 
160,000

 
160,000

 

 

Long-term debt(1)
 
391,933

 
419,000

 

 
419,000

 


(1) Amounts exclude capital lease obligations.



18


Note 9: Restructuring charges

Net restructuring charges for each period consisted of the following components:
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands, except number of employees)
 
2015
 
2014
 
2015
 
2014
Severance accruals
 
$
1,443

 
$
4,546

 
$
3,493

 
$
7,213

Severance reversals
 
(282
)
 
(271
)
 
(976
)
 
(866
)
Operating lease obligations
 
88

 

 
88

 

Net restructuring accruals
 
1,249

 
4,275


2,605


6,347

Other costs
 
489

 
80

 
551

 
2,464

Net restructuring charges
 
$
1,738

 
$
4,355


$
3,156


$
8,811

Number of employees included in severance accruals
 
50

 
145

 
200

 
210


The net restructuring charges are reflected in the consolidated statements of comprehensive income as follows:
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
 
2015
 
2014
 
2015
 
2014
Total cost of revenue
 
$
233

 
$
162

 
$
418

 
$
304

Operating expenses
 
1,505

 
4,193

 
2,738

 
8,507

Net restructuring charges
 
$
1,738

 
$
4,355


$
3,156


$
8,811


During the quarters and nine months ended September 30, 2015 and September 30, 2014, the net restructuring accruals included severance charges related to employee reductions across functional areas as we continue to reduce costs, primarily within our sales and marketing, information technology and fulfillment functions. These charges were reduced by the reversal of restructuring accruals recorded in previous periods, as fewer employees received severance benefits than originally estimated. Other restructuring costs, which were expensed as incurred, included items such as information technology costs, employee and equipment moves, training and travel related to our restructuring activities.

Restructuring accruals of $2,429 as of September 30, 2015 and $4,276 as of December 31, 2014 are reflected in the consolidated balance sheet in accrued liabilities. The majority of the employee reductions are expected to be completed in the fourth quarter of 2015, and we expect most of the related severance payments to be paid by mid-2016, utilizing cash from operations. As of September 30, 2015, approximately 65 employees had not yet started to receive severance benefits.

Accruals for our restructuring initiatives, summarized by year, were as follows:
(in thousands)
 
2012
 initiatives
 
2013
 initiatives
 
2014
initiatives
 
2015
initiatives
 
Total
Balance, December 31, 2014
 
$
32

 
$
128

 
$
4,116

 
$

 
$
4,276

Restructuring charges
 

 

 
87

 
3,494

 
3,581

Restructuring reversals
 

 
(10
)
 
(691
)
 
(275
)
 
(976
)
Payments
 
(32
)
 
(80
)
 
(3,243
)
 
(1,097
)
 
(4,452
)
Balance, September 30, 2015
 
$


$
38

 
$
269

 
$
2,122

 
$
2,429

Cumulative amounts:
 
 

 
 
 
 
 
 
 
 

Restructuring charges
 
$
8,012

 
$
7,629

 
$
8,227

 
$
3,494

 
$
27,362

Restructuring reversals
 
(1,363
)
 
(1,006
)
 
(1,333
)
 
(275
)
 
(3,977
)
Payments
 
(6,649
)
 
(6,585
)
 
(6,625
)
 
(1,097
)
 
(20,956
)
Balance, September 30, 2015
 
$


$
38

 
$
269

 
$
2,122

 
$
2,429



19


The components of our restructuring accruals, by segment, were as follows:
 
 
Employee severance benefits
 
Operating lease obligations
 
 
(in thousands)
 
Small Business Services
 
Financial Services
 
Direct Checks
 
 
Corporate
 
Small Business Services
 
Direct Checks
 
Total
Balance, December 31, 2014
 
$
1,412

 
$
1,848

 
$

 
$
984

 
$
32

 
$

 
$
4,276

Restructuring charges
 
1,491

 
1,289

 

 
713

 
88

 

 
3,581

Restructuring reversals
 
(602
)
 
(161
)
 

 
(213
)
 

 

 
(976
)
Inter-segment transfer
 
28

 
(14
)
 

 
(14
)
 

 

 

Payments
 
(1,543
)
 
(2,047
)
 

 
(830
)
 
(32
)
 

 
(4,452
)
Balance, September 30, 2015
 
$
786

 
$
915


$


$
640


$
88

 
$


$
2,429

Cumulative amounts(1):
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Restructuring charges
 
$
9,934

 
$
8,074

 
$
585

 
$
8,069

 
$
530

 
$
170

 
$
27,362

Restructuring reversals
 
(1,901
)
 
(736
)
 
(59
)
 
(1,124
)
 
(157
)
 

 
(3,977
)
Inter-segment transfer
 
28

 
(14
)
 
(25
)
 
11

 

 

 

Payments
 
(7,275
)
 
(6,409
)
 
(501
)
 
(6,316
)
 
(285
)
 
(170
)
 
(20,956
)
Balance, September 30, 2015
 
$
786

 
$
915


$


$
640


$
88

 
$


$
2,429


(1) Includes accruals related to our cost reduction initiatives for 2012 through 2015.


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 supplemental executive retirement plan in the United States. Further information regarding our postretirement benefit plans can be found under the caption “Note 12: Postretirement benefits” in the Notes to Consolidated Financial Statements appearing in the 2014 Form 10-K.

Postretirement benefit income for each period consisted of the following components:
 
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
 
2015
 
2014
 
2015
 
2014
Interest cost
 
$
859

 
$
1,138

 
$
2,578

 
$
3,415

Expected return on plan assets
 
(1,958
)
 
(2,183
)
 
(5,875
)
 
(6,550
)
Amortization of prior service credit
 
(355
)
 
(355
)
 
(1,066
)
 
(1,066
)
Amortization of net actuarial losses
 
780

 
854

 
2,340

 
2,563

Net periodic benefit income
 
$
(674
)
 
$
(546
)
 
$
(2,023
)
 
$
(1,638
)



20


Note 11: Debt

Debt outstanding was comprised of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
7.0% senior notes due March 15, 2019
 
$

 
$
200,000

6.0% senior notes due November 15, 2020(1)
 
197,184

 
191,933

Long-term portion of capital lease obligations
 
1,278

 
1,468

Long-term portion of debt
 
198,462

 
393,401

Amount drawn on credit facility
 
269,000

 
160,000

Short-term bank loan
 
50,000

 

Capital lease obligations due within one year
 
1,049

 
911

Total debt
 
$
518,511

 
$
554,312


(1) Includes decrease due to cumulative change in fair value of hedged debt of $2,816 as of September 30, 2015 and $8,067 as of December 31, 2014.

Our senior notes due in 2020 include covenants that place certain restrictions on the issuance of additional debt and limitations on certain liens. If our ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) to interest expense, as defined in such instruments, falls below two to one, there would be additional limitations on our ability to issue additional debt. The notes due in 2020 also include limitations on our ability to issue redeemable stock and preferred stock, make loans and investments, and consolidate, merge or sell all or substantially all of our assets. Absent certain defined events of default under our debt instruments, and as long as our ratio of EBITDA to interest expense is in excess of two to one, our debt covenants do not restrict our ability to pay cash dividends at our current rate. There are currently no limitations on the amount of dividends and share repurchases under the terms of our credit facility agreement or our short-term bank loan. However, if our leverage ratio, defined as total debt less unrestricted cash to EBITDA, should exceed 2.75 to one, there would be an annual limitation on the amount of dividends and share repurchases under the terms of these agreements.

Long-term debt – In November 2012, we issued $200,000 of 6.0% senior notes maturing on November 15, 2020. The notes were issued via a private placement under Rule 144A of the Securities Act of 1933. These notes were subsequently registered with the Securities and Exchange Commission (SEC) via a registration statement which became effective on April 3, 2013. Interest payments are due each May and November. The notes are guaranteed by certain of our subsidiaries and place a limitation on restricted payments, including share repurchases and increases in dividend levels. The limitation on restricted payments does not apply if the notes are upgraded to an investment-grade credit rating. Financial information for the guarantor subsidiaries can be found in Note 15. At any time prior to November 15, 2015, we may on one or more occasions redeem up to 35% of the original principal amount of the notes with the proceeds of one or more equity offerings at a redemption price of 106% of the principal amount of the notes, together with accrued and unpaid interest. At any time prior to November 15, 2016, we may also redeem some or all of the notes at a price equal to 100% of the principal amount plus accrued and unpaid interest and a make-whole premium. At any time on or after November 15, 2016, we may redeem some or all of the notes at prices ranging from 100% to 103% of the principal amount. If at any time we sell certain of our assets or experience specific types of changes in control, we must offer to purchase all of the outstanding notes at 101% of the principal amount. We classify payments for early redemption premiums as financing activities in our consolidated statements of cash flows. Proceeds from the offering, net of offering costs, were $196,340. These proceeds were used to retire our senior notes which were due in June 2015. The fair value of the notes issued in November 2012 was $210,200 as of September 30, 2015, based on quoted prices that are directly observable. As discussed in Note 7, we have entered into interest rate swaps to hedge these notes.

In March 2011, we issued $200,000 of 7.0% senior notes maturing on March 15, 2019. The notes were issued via a private placement under Rule 144A of the Securities Act of 1933. These notes were subsequently registered with the SEC via a registration statement which became effective on January 10, 2012. Proceeds from the offering, net of offering costs, were $196,195. These proceeds were used to retire a portion of our senior, unsecured notes due in 2012. In March 2015, we retired all of these notes, realizing a loss on early debt extinguishment of $8,917 during the nine months ended September 30, 2015. This retirement was funded utilizing our credit facility and a short-term bank loan.

We had capital lease obligations of $2,327 as of September 30, 2015 and $2,379 as of December 31, 2014 related to information technology hardware. The lease obligations will be paid through June 2019. The related assets are included in property, plant and equipment in the consolidated balance sheets. Depreciation of the leased assets is included in depreciation expense in the consolidated statements of cash flows.

21



Short-term borrowings – In March 2015, we entered into a $75,000 short-term variable rate bank loan. Under the terms of the credit agreement, we were required to repay any principal amount outstanding greater than $50,000 on September 5, 2015, and any remaining principal amount must be repaid by March 3, 2016. We may prepay the loan in whole or in part at our discretion. Interest payments are due at the end of each quarter. Proceeds from this loan, net of offering costs, were $74,880 and were used, along with a draw on our credit facility, to retire all $200,000 of our 7.0% senior notes which were scheduled to mature on March 15, 2019. As of September 30, 2015, $50,000 was outstanding under this bank loan at an interest rate of 1.78%.

As of September 30, 2015, we had a $350,000 credit facility, which is scheduled to expire in February 2019. Our quarterly commitment fee ranges from 0.20% to 0.40% based on our leverage ratio. Borrow