DELUXE CORPORATION The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the consolidated audited financial statements and related notes included in Part II, Item 8 of this Form 10-K. Our 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; CEO Transition 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 this report outlines currently known material risks and important information to consider when evaluating our forward-looking statements. 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 Annual Report on Form 10-K, in future filings with theSecurities 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 theU.S. ("GAAP"). In addition, we discuss adjusted diluted earnings per share (EPS) and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), 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 measures of adjusted diluted EPS and adjusted EBITDA 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 measures can be found in Consolidated Results of Operations. EXECUTIVE OVERVIEW As ofDecember 31, 2019 , we operated 3 reportable business segments: Small Business Services, Financial Services and Direct Checks. Our business segments were generally organized by customer type and reflected the way we managed the company through that date. Further information regarding our segments and our product and service offerings can be found under the caption "Note 19: Business segment information" of the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. 2019 results vs. 2018 - Loss before income taxes for 2019 of$185.6 million , compared to income before income taxes of$212.6 million for 2018, reflected an increase in asset impairment charges of$289.7 million (as described below), an increase in restructuring, integration and other costs of$58.3 million in support of our growth strategies and to increase our efficiency, and continued volume reductions in personal and business checks and forms, due primarily to the secular decline in check and forms usage. Additionally, we made investments in our transformation to One Deluxe, shipping and material rates increased in 2019, medical costs increased approximately$11.5 million , interest expense increased$7.6 million , organic Small Business Services marketing solutions and web services revenue declined and the Small Business Services commission rate on customer referrals increased. Additionally, share-based compensation increased$6.3 million , driven by an increase in the level of equity awards in 2019, and check pricing pressure within Financial Services continued. We also recognized gains from sales of businesses and customer lists within Small Business Services of$15.6 million in 2018. These increases in loss before income taxes were partially offset by benefits of approximately$50.0 million from continuing initiatives to reduce our cost structure, the benefit of Small Business Services price increases, a decrease in amortization expense related to acquisitions completed prior to 2018 and incremental earnings from businesses acquired. 23 -------------------------------------------------------------------------------- Diluted loss per share for 2019 of$4.65 , as compared to diluted EPS of$3.16 for 2018, reflects the increase in loss before income taxes described in the preceding paragraph, as well as an unfavorable income tax rate as compared to 2018, partially offset by lower average shares outstanding in 2019. Adjusted diluted EPS for 2019 was$6.82 , compared to$6.88 for 2018, and excludes the impact of non-cash items or items that we believe are not indicative of ongoing operations. A reconciliation of diluted (loss) earnings per share to adjusted diluted EPS can be found in Consolidated Results of Operations. Asset impairment charges - Net loss for 2019 was driven by the impact of pretax asset impairment charges in the third quarter of 2019 of$391.0 million , or$7.94 per share. The impairment charges related to the goodwill of our Small Business Services Web Services and Financial Services Data-Driven Marketing reporting units, as well as amortizable intangible assets, primarily in our Small Business Services Web Services reporting unit. This compares to pretax asset impairment charges of$101.3 million , or$1.96 per share, in 2018. Further information regarding these impairment charges can be found under the caption "Note 8: Fair value measurements" of the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
"One Deluxe" Strategy
A detailed discussion of our strategy can be found in Part I, Item 1 of this report. In support of our strategy, we are investing significant resources to build out our technology platforms, including sales technology that enables a single view of our customers, thereby providing for deeper cross-sell opportunities. We implemented a human capital management system inJanuary 2020 , and we are also investing in our financial tools, including an enterprise resource planning system and a financial planning and analysis system. Strategically, we believe these enhancements will allow us to better assess and manage our business at the total company level and will make it easier for us to quickly integrate any future acquisitions. We plan to invest approximately$70.0 million in 2020 in support of these initiatives, consisting of capitalized cloud computing implementation costs and expense items. We plan to fund a large portion of these investments through structural cost savings. While we will continue to sell to enterprise, small business, financial services and individual customers, our business is no longer organized by customer type. Instead, effectiveJanuary 1, 2020 , we began managing the company based on our product and service offerings, focusing on 4 primary business areas: Payments, Cloud Solutions, Promotional Solutions and Checks. We expect to reinvest free cash flow into the 2 areas we view as our primary platforms for growth: Payments and Cloud Solutions. We appointed general managers for each of the 4 new focus areas and we continue to refine our new organization. Realignments such as this take time, considerable senior management effort, material "buy-in" from employees and significant investment. Beginning in the first quarter of 2020, the 4 focus areas become our reportable business segments, and we will begin reporting financial results under this new segment structure.
Outlook for 2020
We anticipate that consolidated revenue for 2020 will be between$2.000 billion and$2.040 billion , compared to$2.009 billion for 2019. We expect that adjusted EBITDA for 2020 will be between$410.0 million and$435.0 million , compared to$480.9 million in 2019, and that adjusted diluted EPS will be between$5.50 and$5.95 for 2020, compared to$6.82 for 2019. The expected decreases in adjusted EBITDA and adjusted diluted EPS result primarily from revenue mix changes in web hosting and data-driven marketing, from the secular decline in checks and from check-related contract renewals. Additionally, we plan to make incremental investments to drive revenue growth. We believe the payback from our One Deluxe strategy will be substantial over time and that investing in our existing business is the best use of our resources. We believe that cash generated by operating activities, along with availability under our revolving credit facility, will be sufficient to support our operations for the next 12 months, including capital expenditures of approximately$70.0 million , dividend payments, required interest payments and periodic share repurchases, as well as possible acquisitions. As ofDecember 31, 2019 ,$261.1 million was available for borrowing under our revolving credit facility. We expect to maintain a disciplined approach to capital deployment that focuses on our need to continue investing in initiatives to drive revenue growth. We anticipate that our board of directors will maintain our current dividend level. However, dividends are approved by the board of directors on a quarterly basis, and thus are subject to change. To the extent we generate excess cash, we expect to opportunistically repurchase common shares and/or reduce the amount outstanding under our credit facility. We expect that share repurchases in 2020 will be lower than in recent years while we invest in our One Deluxe strategy. 24 --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Revenue
Change
(in thousands, except per order amounts) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Total revenue $ 2,008,715 $ 1,998,025 $ 1,965,556 0.5% 1.7%
Orders 47,815 47,534 49,981 0.6% (4.9%)
Revenue per order $ 42.01 $ 42.03 $ 39.33 - 6.9%
The increase in total revenue for 2019, as compared to 2018, was driven
primarily by incremental revenue of approximately $65.1 million from businesses
acquired, Small Business Services price increases and an increase in Financial
Services data-driven marketing volume. Information regarding our acquisitions
can be found under the caption "Note 6: Acquisitions" in the Notes to
Consolidated Financial Statements appearing in Part II, Item 8 of this report.
These increases in revenue were partially offset by the continuing decline in
order volume for both personal and business checks, as well as forms and
accessories sold by Small Business Services. In addition, Small Business
Services marketing solutions and web services volume, excluding incremental
revenue from businesses acquired, declined approximately $11.0 million and $9.0
million , respectively. Revenue was also negatively impacted during 2019 by
continued check pricing pressure within Financial Services.
The increase in total revenue for 2018, as compared to 2017, was driven by
incremental revenue from acquired businesses of approximately $86.7 million , as
well as Small Business Services price increases. Information regarding our
acquisitions can be found under the caption "Note 6: Acquisitions" in the Notes
to Consolidated Financial Statements appearing in Part II, Item 8 of this
report. These increases in revenue were partially offset by lower order volume
for both personal and business checks, as well as forms and accessories sold by
Small Business Services. In addition, Financial Services Deluxe Rewards revenue
decreased approximately $11.0 million due to the loss of Verizon Communications
Inc. as a customer in late 2017, Small Business Services search and email
marketing volume decreased approximately $6.0 million due to the loss of a
customer, and revenue was negatively impacted by continued check pricing
pressure within Financial Services.
Service revenue represented 29.8% of total revenue in 2019, 27.3% in 2018 and
25.2% in 2017. As such, the majority of our revenue is generated by product
sales. We do not manage our business based on product versus service revenue.
Instead, we analyze our products and services based on the following categories:
Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Marketing solutions and other
services (MOS):
Small business marketing
solutions 14.0 % 14.6 % 13.3 % (0.6) pt. 1.3 pt.
Treasury management solutions 9.6 % 7.4 % 5.5 % 2.2 pt. 1.9 pt.
Web services 8.3 % 8.1 % 6.7 % 0.2 pt. 1.4 pt.
Data-driven marketing
solutions 7.9 % 7.4 % 7.7 % 0.5 pt. (0.3) pt.
Fraud, security, risk
management and operational
services 4.3 % 4.5 % 5.2 % (0.2) pt. (0.7) pt.
Total MOS 44.1 % 42.0 % 38.4 % 2.1 pt. 3.6 pt.
Checks 39.0 % 40.6 % 43.3 % (1.6) pt. (2.7) pt.
Forms, accessories and other
products 16.9 % 17.4 % 18.3 % (0.5) pt. (0.9) pt.
Total revenue 100.0 % 100.0 % 100.0 % - -
The number of orders increased slightly in 2019, as compared to 2018, due
primarily to the growth in MOS, including the impact of acquisitions, partially
offset by the continuing secular decline in check and forms usage. Revenue per
order remained virtually unchanged in 2019, as compared to 2018, as the benefit
of Small Business Services price increases and the mix of product and service
revenue in each period were offset by the negative impact of continued check
pricing pressure in Financial Services.
The number of orders decreased in 2018, as compared to 2017, driven by the
continuing secular decline in check and forms usage, partially offset by the
impact of our acquisitions. Revenue per order increased in 2018, as compared to
2017, primarily due to the benefit of price increases and favorable product and
service mix, partially offset by the impact of continued check pricing pressure
in Financial Services.
25--------------------------------------------------------------------------------
Consolidated Cost of Revenue
Change
(in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Total cost of revenue $ 812,935 $ 791,748 $ 742,707 2.7% 6.6%
Total cost of revenue as a
percentage of total revenue 40.5 % 39.6 % 37.8 % 0.9 pt. 1.8 pt.
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 increase in total cost of revenue for 2019, as compared to 2018, was primarily attributable to incremental costs of businesses acquired of approximately$32.9 million , as well as increased shipping and material rates and an increase in medical costs of approximately$5.0 million in 2019. In addition, restructuring and integration expense increased$2.1 million in 2019. Partially offsetting these increases in total cost of revenue was the impact of the lower order volume for both personal and business checks, as well as forms and accessories sold by Small Business Services. In addition, manufacturing efficiencies and other benefits resulting from our continued cost reduction initiatives resulted in a reduction in total cost of revenue of approximately$10.0 million . Total cost of revenue as a percentage of total revenue increased as compared to 2018, due in large part to the increase in service revenue, including the impact of acquisitions, as well as the increase in shipping, materials, medical, restructuring and integration costs, partially offset by Small Business Services price increases. The increase in total cost of revenue for 2018, as compared to 2017, was primarily attributable to the increase in revenue, including incremental costs of acquired businesses of$40.5 million , as well as unfavorable product mix and increased shipping and material rates in 2018. Partially offsetting these increases in total cost of revenue was the impact of lower order volume for both personal and business checks, as well as forms and accessories sold by Small Business Services. In addition, total cost of revenue decreased due to manufacturing efficiencies and other benefits resulting from our continued cost reduction initiatives of approximately$15.0 million . Total cost of revenue as a percentage of total revenue increased in 2018, as compared to 2017, due in large part to the impact of acquisitions, as well as the increase in service revenue.
Consolidated Selling, General & Administrative (SG&A) Expense
Change
(in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
SG&A expense $ 891,693 $ 854,000 $ 830,231 4.4% 2.9%
SG&A expense as a percentage of
total revenue 44.4 % 42.7 % 42.2 % 1.7 pt. 0.5 pt.
The increase in SG&A expense for 2019, as compared to 2018, was driven by
incremental costs of $27.5 million from businesses acquired, including
acquisition amortization, as well as investments in our transformation to One
Deluxe, an increase in the Small Business Services commission rate on customer
referrals, an increase of $7.0 million in share-based compensation expense,
driven by an increase in the level of equity awards in 2019, a $6.5 million
increase in medical costs, increased sales incentives in our data-driven
marketing business and an increase in legal-related expenses of approximately
$4.0 million . Also, during 2018, we recognized gains from sales of businesses
and customer lists within Small Business Services of $15.6 million . Further
information regarding these asset sales can be found under the caption "Note 3:
Supplemental balance sheet and cash flow information" in the Notes to
Consolidated Financial Statements appearing in Part II, Item 8 of this report.
These increases in SG&A expense were partially offset by various expense
reduction initiatives of approximately $40.0 million . Also, amortization expense
related to acquisitions completed prior to 2018 decreased approximately $14.5
million in 2019, as compared to 2018.
The increase in SG&A expense for 2018, as compared to 2017, was driven by
incremental costs of acquired businesses of approximately $39.4 million ,
innovation investments, Small Business Services legal costs of $10.5 million
related to certain resolved litigation matters, a higher average Small Business
Services commission rate and Chief Executive Officer (CEO) transition costs of
$7.2 million in 2018. These increases in SG&A expense were partially offset by
various expense reduction initiatives of approximately $35.0 million , primarily
within our sales and marketing organizations, and decreases in incentive
compensation and medical costs of approximately $5.0 million each. Also, during
2018, we recognized gains from sales of businesses and customer lists within
Small Business Services of $15.6 million , compared to gains recognized in 2017
of $8.7 million . Further information regarding these asset sales can be found
under the caption "Note 3: Supplemental balance sheet and cash flow information"
in the Notes to Consolidated Financial Statements appearing in Part II, Item 8
of this report.
26--------------------------------------------------------------------------------
Restructuring and Integration Expense
Change
2019 vs. 2018 vs.
(in thousands) 2019 2018 2017 2018 2017
Restructuring and integration expense $ 71,248 $ 19,737 $ 8,562 Our restructuring and integration activities increased in each of the last 2 years, as we are currently pursuing several initiatives designed to focus our business behind our growth strategy and to increase our efficiency. In addition to the expense shown here, restructuring and integration expense of$3.6 million in 2019,$1.5 million in 2018 and$0.6 million in 2017 was included within total cost of revenue on our consolidated statements of (loss) income. Further information can be found under Restructuring, Integration and Other Costs.
Asset Impairment Charges
Change
2018 vs.
(in thousands) 2019 2018 2017 2019 vs. 2018 2017
Asset impairment charges $ 390,980 $ 101,319 $ 54,880 $ 289,661 $ 46,439
During the third quarter of 2019, we recorded pretax asset impairment charges of
$391.0 million related to goodwill and certain trade name, customer list and
technology intangible assets. Further information regarding these charges can be
found under the caption "Note 8: Fair value measurements" in the Notes to
Consolidated Financial Statements appearing in Part II, Item 8 of this report.
During the third quarter of 2018, we recorded pretax asset impairment charges of
$99.2 million related to goodwill and an indefinite-lived trade name, as well as
certain customer list intangible assets. During the first quarter of 2018, we
recorded a pretax asset impairment charge of $2.1 million related to an
additional customer list intangible asset. Further information regarding these
charges can be found under the caption "Note 8: Fair value measurements" in the
Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this
report.
During the third quarter of 2017, we recorded pretax asset impairment charges of
$46.6 million related to goodwill, the discontinued NEBS trade name and other
non-current assets, primarily internal-use software. Further information
regarding these charges can be found under the caption "Note 8: Fair value
measurements" in the Notes to Consolidated Financial Statements appearing in
Part II, Item 8 of this report. Also during 2017, we recorded pretax asset
impairment charges of $8.3 million related to a small business distributor that
was sold during the second quarter of 2017. Further information regarding these
charges can be found in the discussion of assets held for sale under the caption
"Note 3: Supplemental balance sheet and cash flow information" in the Notes to
Consolidated Financial Statements appearing in Part II, Item 8 of this report.
Interest Expense
Change
(in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Interest expense $ 34,682 $ 27,112 $ 21,359 27.9% 26.9%
Weighted-average debt outstanding 925,715 796,667 754,289
16.2% 5.6%
Weighted-average interest rate 3.54 % 3.21 % 2.55 % 0.33 pt. 0.66 pt.
The increase in interest expense for 2019, as compared to 2018, was driven primarily by our higher weighted-average debt level that funded share repurchases throughout 2019 and 2018 and acquisitions throughout 2018, as well as our higher weighted-average interest rate during 2019.
The increase in interest expense for 2018, as compared to 2017, was primarily
driven by our higher weighted-average interest rate during 2018, as well as the
higher weighted-average debt level used to fund share repurchases and
acquisitions.
Income Tax Provision
Change
(in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Income tax provision $ 14,267 $ 63,001 $ 82,672 (77.4%) (23.8%)
Effective tax rate (7.7 %) 29.6 % 26.4 % (37.3) pt. 3.2 pt.
27-------------------------------------------------------------------------------- The decrease in our effective income tax rate for 2019, as compared to 2018, was driven primarily by the nondeductible portion of the goodwill impairment charges in each period, combined with the impact of the asset impairment charges on pretax (loss) income in each period. The larger non-deductible goodwill impairment charge in 2019 resulted in a decrease in our effective tax rate of 36.4 points, as compared to 2018. In addition, during the third quarter of 2019, we placed a full valuation allowance of$8.4 million on the intangible-related deferred tax asset generated by the impairment of intangible assets located inAustralia , decreasing our tax rate 4.5 points. Partially offsetting these decreases in our effective income tax rate was an increase in our state income tax rate of 1.9 points, as compared to 2018, as well as a benefit of 0.8 points in 2018 related to our accounting for the Tax Cuts and Jobs Act (the "2017 Tax Act"). Further information regarding our effective tax rate for 2019, as compared to 2018, can be found under the caption "Note 11: Income tax provision" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. We anticipate that our effective income tax rate for 2020 will be approximately 25%. EffectiveJanuary 1, 2018 , federal tax reform under the 2017 Tax Act lowered the federal statutory tax rate by 14.0 points. Despite this decrease in the statutory tax rate, our effective tax rate increased for 2018, as compared to 2017, for several reasons, including the one-time impact of the 2017 Tax Act in 2017, which lowered our 2017 effective tax rate 6.6 points; the impact of the larger non-deductible goodwill impairment charge in 2018, which increased our tax rate 5.6 points as compared to 2017; the elimination of the qualified production activities deduction for 2018; favorable adjustments in 2017 related to the tax basis in a small business distributor that was sold; a lower federal benefit of state income taxes due to a lower federal tax rate; and a lower benefit from the tax effects of share-based compensation. A comparison of our effective tax rate for 2018, as compared to 2017, can be found under the caption "Note 11: Income tax provision" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
Diluted (Loss) Earnings per Share
Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Diluted (loss) earnings per share $ (4.65 ) $ 3.16 $ 4.72 (247.2%) (33.1%)
Adjusted diluted EPS(1) 6.82 6.88 6.18 (0.9%) 11.3%
(1) Information regarding the calculation of adjusted diluted EPS can be found in the following section, Reconciliation of Non-GAAP Financial Measures.
The change in diluted loss per share for 2019, as compared to diluted EPS for 2018, was driven primarily by the increase in asset impairment charges of$289.7 million , an increase in restructuring, integration and other costs of$58.3 million in support of our growth strategies and to increase our efficiency, and continued volume reductions in personal and business checks and forms, due primarily to the secular decline in check and forms usage. Additionally, we made investments in our transformation to One Deluxe, shipping and material rates increased in 2019, medical costs increased approximately$11.5 million , interest expense increased$7.6 million , organic Small Business Services marketing solutions and web services revenue declined, and the Small Business Services commission rate on customer referrals increased. Additionally, share-based compensation increased$6.3 million , driven by an increase in the level of equity awards in 2019, and check pricing pressure within Financial Services continued. We also recognized gains from sales of businesses and customer lists within Small Business Services of$15.6 million in 2018 and our effective income tax rate was unfavorable in 2019, driven in large part by the higher goodwill impairment charges in 2019. These increases in diluted loss per share were partially offset by lower shares outstanding in 2019, a benefit of approximately$50.0 million from continuing initiatives to reduce our cost structure, the benefit of Small Business Services price increases, a decrease in amortization expense related to acquisitions completed prior to 2018 and incremental earnings from businesses acquired. The decrease in adjusted diluted EPS for 2019, as compared to 2018, was driven primarily by the continuing decline in checks, forms and accessories, investments in our transformation to One Deluxe, increased shipping and material rates, increased medical costs and interest expense, lower organic Small Business Services marketing solutions and web services revenue, a higher Small Business Services commission rate on customer referrals and continued check pricing pressure within Financial Services. These decreases in adjusted diluted EPS were partially offset by lower shares outstanding in 2019, benefits from our cost reduction initiatives, Small Business Services price increases and incremental earnings from businesses acquired. The decrease in diluted EPS for 2018, as compared to 2017, was driven primarily by the increase in asset impairment charges of$46.4 million , volume reductions in personal and business checks and forms, due primarily to the secular decline in check and forms usage, and an increase in restructuring, integration and other costs of$12.1 million in support of our growth strategies and to increase our efficiency. Additionally, Deluxe Rewards revenue decreased, driven primarily by the loss of Verizon Communications Inc. as a customer in late 2017, Small Business Services legal costs increased due to certain resolved litigation matters, the Small Business Services commission rate increased, we incurred CEO transition costs of$7.2 million in 2018 and check pricing pressure within Financial Services continued. Also, our effective income tax rate was higher in 2018, as compared to 2017, driven primarily by the tax impact of the higher goodwill impairment charge in 2018. Partially offsetting these decreases in diluted EPS were continuing initiatives to reduce our cost structure, primarily within our sales, marketing and fulfillment organizations, the benefit of Small Business Services price increases, lower shares outstanding in 2018, as compared to 2017, 28 -------------------------------------------------------------------------------- and lower medical and incentive compensation expense. In addition, we recognized gains from sales of businesses and customer lists within Small Business Services of$15.6 million in 2018, compared to gains of$8.7 million in 2017. The increase in adjusted diluted EPS for 2018, as compared to 2017, was driven primarily by continuing initiatives to reduce our cost structure, primarily within our sales, marketing and fulfillment organizations, the benefit of Small Business Services price increases and lower medical and incentive compensation expense in 2018. Additionally, our effective income tax rate was lower in 2018, excluding the impact of the 2017 Tax Act and the goodwill impairment charges in both years, and shares outstanding were lower in 2018, as compared to 2017. Partially offsetting these increases in adjusted diluted EPS were volume reductions in personal and business checks and forms, the decline in Deluxe Rewards revenue, the increase in the Small Business Services commission rate and continued check pricing pressure within Financial Services.
Reconciliation of Non-GAAP Financial Measures
Note that we have not reconciled adjusted EBITDA or
adjusted diluted EPS outlook guidance for 2020 to the directly comparable GAAP
financial measure because we do not provide outlook guidance for net income or
GAAP diluted EPS or the reconciling items between net income, adjusted EBITDA
and GAAP diluted EPS. 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 items is high
and, based on historical experience, could be material.
Adjusted diluted EPS - By excluding the impact of non-cash items or items that
we believe are not indicative of ongoing operations, 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.
29
--------------------------------------------------------------------------------Diluted (loss) earnings per share reconciles to adjusted diluted EPS as follows:
Year Ended December 31,
(in thousands, except per share amounts) 2019 2018 2017
Net (loss) income $ (199,897 ) $ 149,630 $ 230,155
Asset impairment charges 390,980 101,319 54,880
Acquisition amortization 70,720 78,577 74,944Restructuring, integration and other costs 79,511 21,203
9,130
CEO transition costs(1) 9,390 7,210 - Share-based compensation expense 19,138 11,689 15,109 Acquisition transaction costs 215 1,719 2,342 Certain legal-related expense 6,420 10,502 - Loss (gain) on sales of businesses and customer lists 124 (15,641 ) (8,703 ) Loss on debt retirement - 453 - Adjustments, pre-tax 576,498 217,031 147,702 Income tax provision impact of pre-tax adjustments(2) (81,868 ) (39,715 ) (56,024 ) Impact of federal tax reform - (1,700 ) (20,500 ) Adjustments, net of tax 494,630 175,616 71,178 Adjusted net income$ 294,733 $ 325,246 $ 301,333 GAAP Diluted EPS$ (4.65 ) $ 3.16 $ 4.72 Adjustments, net of tax 11.47 3.72 1.46 Adjusted Diluted EPS(3)$ 6.82 $ 6.88 $ 6.18
(1) Includes share-based compensation expense related to the modification of certain awards in conjunction with our CEO transition.
(2) The tax effect of the pretax 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 theU.S. effective tax rate for each adjustment. However, the tax impact of certain adjustments, such as asset impairment charges, share-based compensation expense and CEO transition costs, depends on whether the amounts are deductible in the respective tax jurisdictions and the applicable effective tax rate(s) in those jurisdictions. (3) The total of weighted-average shares and potential common shares outstanding used in the calculation of adjusted diluted EPS for 2019 was 158 thousand shares higher than that used in the GAAP diluted EPS calculation. Because of our net loss in 2019, the GAAP calculation includes no impact for potential common shares because their effect would have been antidilutive. 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 overall 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 increased ability to attract financing and 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 or debt service payments. 30 --------------------------------------------------------------------------------
Net (loss) income reconciles to adjusted EBITDA as follows:
Year Ended December 31,
(in thousands) 2019 2018 2017
Net (loss) income $ (199,897 ) $ 149,630 $ 230,155
Interest expense 34,682 27,112 21,359
Income tax provision 14,267 63,001 82,672
Depreciation and amortization expense 126,036 131,100 122,652
Asset impairment charges 390,980 101,319
54,880
Restructuring, integration and other costs 79,511 21,203
9,130
CEO transition costs(1) 9,390 7,210 - Share-based compensation expense 19,138 11,689 15,109 Acquisition transaction costs 215 1,719 2,342 Certain legal-related expense 6,420 10,502 - Loss (gain) on sales of businesses and customer lists 124 (15,641 ) (8,703 ) Loss on debt retirement - 453 - Adjusted EBITDA$ 480,866 $ 509,297 $ 529,596
(1) Includes share-based compensation expense related to the modification of certain awards in conjunction with our CEO transition.
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, sales and human resources 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 and project management services and internal labor, as well as other miscellaneous costs associated with our initiatives, such as training, travel and relocation. In addition, we recorded employee severance costs related to these initiatives, as well as our ongoing cost reduction initiatives, across functional areas. Our restructuring and integration activities increased in 2019, as we are currently pursuing several initiatives designed to focus our business behind our growth strategy and to increase our efficiency. Further information regarding restructuring and integration expense can be found under the caption "Note 9: Restructuring and integration expense" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. In addition to restructuring and integration expense, we also recognized certain business transformation costs related to optimizing our business processes in line with our growth strategies. These costs totaled$4.7 million in 2019. As discussed in Executive Overview, we plan to invest approximately$70.0 million in 2020 to build out our technology platforms, consisting of capitalized cloud computing implementation costs and expense items. We plan to fund a large portion of these investments through structural cost savings. The majority of the employee reductions included in our restructuring and integration accruals are expected to be completed in the first quarter of 2020, and we expect most of the related severance payments to be paid by the third quarter of 2020. As a result of our employee reductions, we realized cost savings of approximately$15.0 million in SG&A expense and$2.0 million in total cost of revenue in 2019, in comparison to our 2018 results of operations, which represents a portion of the total net cost reductions we realized in 2019. For those employee reductions included in our restructuring and integration accruals as ofDecember 31, 2019 , we expect to realize cost savings of approximately$2.0 million in total cost of revenue and$2.0 million in SG&A expense in 2020, in comparison to our 2019 results of operations, which represents a portion of the total net cost reductions we expect to realize in 2020. 31 --------------------------------------------------------------------------------
CEO TRANSITION COSTS InApril 2018 , we announced the retirement ofLee Schram , our former CEO.Mr. Schram remained employed under the terms of a transition agreement throughMarch 1, 2019 . Under the terms of this agreement, we provided certain benefits toMr. Schram , including a transition bonus in the amount of$2.0 million that was paid inMarch 2019 . In addition, modifications were made to certain of his share-based payment awards. In conjunction with the CEO transition, we offered retention agreements to certain members of our management team under which each employee was entitled to receive a cash bonus equal to his or her annual base salary or up to 1.5 times his or her annual base salary if he or she remained employed during the retention period, generally fromJuly 1, 2018 toDecember 31, 2019 , and complied with certain covenants. In addition to these expenses, we incurred certain other costs related to the CEO transition process, including executive search, legal, travel and board of directors fees in 2018. During 2019, we incurred consulting fees related to the evaluation of our strategic plan and we expensed the majority of the current CEO's signing bonus. CEO transition costs are included in SG&A expense on the consolidated statements of (loss) income and were$9.4 million for 2019 and$7.2 million for 2018. The majority of the remaining management retention bonuses were paid in early 2020. Accruals for CEO transition costs were included within accrued liabilities on the consolidated balance sheet and were$4.4 million as ofDecember 31, 2019 . SEGMENT RESULTS Additional financial information regarding our business segments appears under the caption "Note 19: Business segment information" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
Small Business Services
Results for our Small Business Services segment were as follows:
Change
(in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Total revenue $ 1,255,779 $ 1,283,620 $ 1,239,739 (2.2%) 3.5%
Operating (loss) income (124,235 ) 119,808 181,528 (203.7%) (34.0%)
Operating margin (9.9 %) 9.3 % 14.6 % (19.2) pt. (5.3) pt.
The decrease in total revenue for 2019, as compared to 2018, was driven by lower
order volume, primarily related to checks, forms and accessories, as secular
check and forms usage continues to decline. Small business marketing solutions
volume also decreased approximately $11.0 million due to the loss of a large
customer and a decline in promotional products, and web services volume
decreased approximately $9.0 million , excluding the effect of 2018 acquisitions,
due primarily to a reduction in search and email marketing and web hosting
volume. In addition, revenue was negatively impacted $4.3 million by foreign
currency exchange rate changes. These decreases in revenue were partially offset
by the benefit of price increases and incremental revenue of approximately $16.1
million from businesses acquired in 2018. Information about our acquisitions can
be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated
Financial Statements appearing in Part II, Item 8 of this report.
The operating loss for 2019, as compared to operating income for 2018, was
driven primarily by an increase in asset impairment charges of $174.1 million .
The higher charges resulted in a 14.0 point reduction in operating margin in
2019, as compared to 2018. Further information regarding the asset impairment
charges can be found under the caption "Note 8: Fair value measurements" in the
Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this
report. In addition, operating loss increased due to a $41.8 million increase in
restructuring, integration and other costs in support of our growth strategies
and to increase our efficiency, as well as the lower order volume for checks,
forms, accessories, marketing solutions and web services. Also contributing to
the increase in operating loss was investments in our transformation to One
Deluxe, an increase in the commission rate on customer referrals, increased
medical costs, higher material and shipping rates and a $2.8 million increase in
share-based compensation, driven by an increase in the level of equity awards in
2019. Also, during 2018, we recognized gains from sales of businesses and
customer lists of $15.6 million . Further information regarding these asset sales
can be found under the caption "Note 3: Supplemental balance sheet and cash flow
information" in the Notes to Consolidated Financial Statements appearing in Part
II, Item 8 of this report. Partially offsetting these increases in operating
loss was the benefit of price increases, benefits of our cost reduction
initiatives and lower legal-related expenses in 2019, as we recorded $10.5
million of expense in 2018 related to certain resolved litigation matters.
Additionally, acquisition amortization decreased $5.6 million compared to 2018.
The increase in total revenue for the 2018, as compared to 2017, was driven by
incremental revenue from acquired businesses of approximately $53.5 million and
the benefit of price increases. Information about our acquisitions can be found
32
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under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial
Statements appearing in Part II, Item 8 of this report. These increases in
revenue were partially offset by lower order volume, primarily related to
checks, forms and accessories, as secular check and forms usage continues to
decline. Search and email marketing volume also decreased approximately $6.0
million due to the loss of a customer.
The decreases in operating income and operating margin for 2018, as compared to
2017, were primarily driven by an increase in asset impairment charges of $44.6
million . The higher charges resulted in a 3.3 point reduction in operating
margin in 2018, compared to 2017. Further information regarding the asset
impairment charges can be found under the caption "Note 8: Fair value
measurements" in the Notes to Consolidated Financial Statements appearing in
Part II, Item 8 of this report. In addition, operating income decreased due to
lower order volume for checks, forms and accessories, driven by the continuing
secular decline in check and forms usage, as well as higher commission, material
and shipping rates in 2018, innovation investments, legal costs of $10.5 million
related to certain resolved litigation matters, and a $5.5 million increase in
restructuring and integration expense. Also, $4.0 million of our CEO transition
costs were allocated to this segment in 2018. Partially offsetting these
decreases in operating income and operating margin were price increases,
benefits of our cost reduction initiatives and lower incentive compensation and
medical costs. In addition, we recognized gains from sales of businesses and
customer lists in 2018 of $15.6 million , compared to gains of $8.7 million in
2017. Further information regarding these asset sales can be found under the
caption "Note 3: Supplemental balance sheet and cash flow information" in the
Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this
report. The results of acquired businesses contributed operating income of $3.6
million for 2018, including acquisition-related amortization, but resulted in a
0.5 point decrease in operating margin.
Financial Services
Results for our Financial Services segment were as follows:
Change
(in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Total revenue $ 633,498 $ 586,967 $ 585,275 7.9% 0.3%
Operating (loss) income (67,524 ) 69,939 101,047 (196.5%) (30.8%)
Operating margin (10.7 %) 11.9 % 17.3 % (22.6) pt. (5.4) pt.
The increase in total revenue for 2019, as compared to 2018, was driven by
incremental treasury management revenue of approximately $49.1 million from
businesses acquired. Information regarding our acquisitions can be found under
the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial
Statements appearing in Part II, Item 8 of this report. In addition, data-driven
marketing volume increased. Partially offsetting these increases in revenue was
lower check order volume, due primarily to the continued secular decline in
check usage, as well as a decrease in treasury management volume of
approximately $3.6 million for 2019, excluding the incremental revenue from
acquisitions, due to a customer electing to bring its services in-house and a
reduction in software maintenance revenue. In addition, revenue was negatively
affected by continued check pricing pressure.
The operating loss for 2019, as compared to operating income for 2018, was
primarily due to an increase in asset impairment charges of $115.5 million . The
higher charges resulted in an 18.2 point reduction in operating margin in 2019,
as compared to 2018. Further information regarding the asset impairment charges
can be found under the caption "Note 8: Fair value measurements" in the Notes to
Consolidated Financial Statements appearing in Part II, Item 8 of this report.
In addition, operating loss increased due to a $12.2 million increase in
restructuring, integration and other costs in support of our growth strategies
and to increase our efficiency, as well as lower check order volume, investments
in our transformation to One Deluxe, a $5.0 million increase in legal-related
expenses in 2019, increased medical costs, higher material and shipping rates, a
$4.4 million increase in share-based compensation, driven by an increase in the
level of equity awards in 2019, and continued check pricing pressure. Partially
offsetting these increases in operating loss were benefits of our continuing
cost reduction initiatives and a contribution of approximately $4.4 million from
businesses acquired, including acquisition amortization.
The increase in total revenue for 2018, as compared to 2017, was driven by
increased treasury management solutions revenue, including incremental revenue
from acquired businesses of approximately $33.2 million . Information about our
acquisitions can be found under the caption "Note 6: Acquisitions" in the Notes
to Consolidated Financial Statements appearing in Part II, Item 8 of this
report. This increase in revenue was partially offset by lower check order
volume due to the continued secular decline in check usage. In addition, Deluxe
Rewards revenue decreased approximately $11.0 million due to the loss of Verizon
Communications Inc. as a customer in late 2017, and revenue was negatively
impacted by continued check pricing pressure.
The decreases in operating income and operating margin for 2018, as compared to
2017, were primarily due to lower check order volume, the impact of the decline
in Deluxe Rewards revenue, continued check pricing pressure, innovation
investments, increased material and shipping rates in 2018 and factors affecting
the profitability of our data-driven marketing offerings. In addition,
restructuring and integration expense was $5.7 million higher than in 2017,
driven by the integration of acquired businesses and the consolidation of
information technology systems, and $3.0 million of our CEO transition costs
were
33
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allocated to this segment in 2018. Partially offsetting these decreases in
operating income and operating margin in 2018 were benefits of our continuing
cost reduction initiatives and lower incentive compensation and medical costs.
While acquired businesses contributed approximately $3.1 million to operating
income in 2018, including acquisition-related amortization, operating margin
decreased 0.3 points for 2018 due to acquired businesses.
Direct Checks
Results for our Direct Checks segment were as follows:
Change
(in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Total revenue $ 119,438 $ 127,438 $ 140,542 (6.3%) (9.3%)
Operating income 33,618 41,474 46,601 (18.9%) (11.0%)
Operating margin 28.1 % 32.5 % 33.2 % (4.4) pt. (0.7) pt.
The decrease in revenue in each of the past 2 years was primarily due to the reduction in orders stemming from the continuing secular decline in check usage.
The decreases in operating income and operating margin for 2019, as compared to 2018, were due primarily to the revenue decline, as well as a$4.3 million increase in restructuring, integration and other costs in support of our growth strategies and to increase our efficiency, increased medical costs and increased material and shipping rates in 2019. These decreases in operating income and operating margin were partially offset by benefits from our cost reduction initiatives, including lower advertising expense driven by advertising print reduction initiatives. The decreases in operating income and operating margin for 2018, as compared to 2017, were due primarily to the lower order volume and increased shipping rates in 2018. These decreases in operating income and operating margin were partially offset by benefits from our cost reduction initiatives, including lower advertising expense driven by advertising print reduction initiatives, as well as lower incentive compensation and medical costs. CASH FLOWS AND LIQUIDITY As ofDecember 31, 2019 , we held cash and cash equivalents of$73.6 million and cash and cash equivalents included in funds held for customers of$101.2 million . The following table shows our cash flow activity for the past 3 years, and should be read in conjunction with the consolidated statements of cash flows appearing in Part II, Item 8 of this report. Change (in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Net cash provided by operating activities$ 286,653 $ 339,315 $ 338,431 $ (52,662 ) $ 884 Net cash used by investing activities (75,751 ) (275,414 ) (180,891 ) 199,663 (94,523 ) Net cash used by financing activities (186,794 ) (39,825 ) (182,956 ) (146,969 ) 143,131 Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents 5,444 (7,636 ) 5,370 13,080 (13,006 ) Net change in cash, cash equivalents, restricted cash and restricted cash equivalents$ 29,552 $ 16,440 $
(20,046 )
The$52.7 million decrease in net cash provided by operating activities for 2019, as compared to 2018, was due primarily to increased restructuring and integration activities in support of our growth strategies and to increase our efficiency, the continuing secular decline in check and forms usage, the payment of certain legal-related expenses, including$12.5 million accrued in the prior year and paid in the first quarter of 2019, an increase of$10.1 million in medical benefit payments and a$7.3 million increase in interest payments. These decreases in operating cash flow were partially offset by benefits of our cost reduction initiatives, a$27.5 million reduction in income tax payments in 2019, the timing of accounts receivable collections and annual billings in certain of our businesses and Small Business Services price increases. 34 -------------------------------------------------------------------------------- The$0.9 million increase in net cash provided by operating activities for 2018, as compared to 2017, was primarily due to a$36.6 million reduction in income tax payments, the benefit of cost reduction initiatives and price increases, the timing of collections of receivables, a$7.2 million reduction in medical benefit payments and a$3.3 million decrease in prepaid product discount payments. These increases in operating cash flow were mostly offset by the continuing secular decline in check and forms usage, lower Financial Services Deluxe Rewards revenue, higher restructuring and integration costs in 2018, the timing of accounts payable payments and a$6.4 million increase in interest payments.
Included in net cash provided by operating activities were the following operating cash outflows:
Change
(in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Income tax payments $ 60,764 $ 88,253 $ 124,878 $ (27,489 ) $ (36,625 )
Medical benefit payments 41,714 31,610 38,806 10,104 (7,196 )
Interest payments 33,227 25,910 19,465 7,317 6,445Prepaid product discount payments 25,637 23,814 27,079
1,823 (3,265 )
Performance-based compensation
payments(1) 23,583 21,780 21,174 1,803 606
Severance payments 10,585 6,971 6,981 3,614 (10 )
(1) Amounts reflect compensation based on total company performance.
Net cash used by investing activities for 2019 was$199.7 million lower than in 2018, driven primarily by a decrease of$202.7 million in payments for acquisitions. Our One Deluxe growth strategy focuses on profitable organic growth, supplemented by acquisitions, rather than being dependent on acquisitions for growth. As such, the amount paid for acquisitions in 2019 decreased significantly from 2018. Information about our acquisitions can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Net cash used by investing activities for 2018 was$94.5 million higher than in 2017, driven primarily by an increase of$75.0 million in payments for acquisitions. Further information about our acquisitions can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. In addition, purchases of capital assets increased$14.8 million , as we continued to invest in key revenue growth initiatives and order fulfillment and information technology infrastructure. We also had proceeds of$3.5 million in 2017 from the redemption of marketable securities that were acquired as part of the acquisition ofRDM Corporation inApril 2017 . Net cash used by financing activities for 2019 was$147.0 million higher than in 2018, due primarily to a net decrease in borrowings on long-term debt of$227.6 million , as our borrowings were higher in 2018 to fund acquisitions and share repurchases. This increase in cash used by financing activities was partially offset by a decrease in share repurchases of$81.5 million . Net cash used by financing activities for 2018 was$143.1 million lower than in 2017, due primarily to a net increase in borrowings on long-term debt of$252.3 million and the net change in customer funds obligations of$26.3 million . Partially offsetting these decreases in cash used by financing activities was a$135.0 million increase in share repurchases and a$3.0 million increase in payments for debt issuance costs related to the revolving credit agreement executed inMarch 2018 .
Significant cash transactions, excluding those related to operating activities, for each period were as follows:
Change
(in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Payments for common shares
repurchased $ (118,547 ) $ (200,000 ) $ (65,000 ) $ 81,453 $ (135,000 )
Purchases of capital assets (66,595 ) (62,238 ) (47,450 ) (4,357 ) (14,788 ) Cash dividends paid to shareholders (51,742 ) (56,669 ) (58,098 )
4,927 1,429
Net change in debt (26,500 ) 201,147 (51,165 ) (227,647 ) 252,312
Payments for acquisitions, net of
cash acquired (11,605 ) (214,258 ) (139,223 ) 202,653 (75,035 )
Employee taxes paid for shares
withheld (3,935 ) (7,977 ) (9,377 ) 4,042 1,400
Net change in customer funds
obligations 12,598 20,279 (6,007 ) (7,681 ) 26,286
Proceeds from issuing shares under
employee plans 3,198 7,523 9,033 (4,325 ) (1,510 )
35-------------------------------------------------------------------------------- As ofDecember 31, 2019 , our foreign subsidiaries held cash and cash equivalents of$69.0 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 theU.S. at one time, we estimate we would incur a foreign withholding tax liability of approximately$3.0 million . We anticipate that net cash generated by operating activities in 2020, along with availability under our revolving credit facility, will be sufficient to support our operations for the next 12 months, including capital expenditures of approximately$70.0 million , dividend payments, required interest payments and periodic share repurchases, as well as possible acquisitions. We intend to focus our capital spending on key revenue growth initiatives, investments in sales and financial technology and information technology infrastructure. As ofDecember 31, 2019 ,$261.1 million was available for borrowing under our revolving credit facility. To the extent we generate excess cash, we plan to opportunistically repurchase common shares and/or reduce the amount outstanding under our credit facility agreement. We expect that share repurchases in 2020 will be lower than in recent years while we invest in our One Deluxe strategy. CAPITAL RESOURCES Our total debt was$883.5 million as ofDecember 31, 2019 , a decrease of$28.4 million fromDecember 31, 2018 . Further information concerning our outstanding debt can be found under the caption "Note 15: Debt" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Information regarding our debt service obligations can be found under Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations.
Our capital structure for each period was as follows:
December 31, 2019 December 31, 2018
Period-end Period-end
(in thousands) Amount interest rate Amount interest rate Change
Fixed interest rate(1) $ 200,000 3.2 % $ 1,864 2.0 % $ 198,136
Floating interest rate 683,500 3.0 % 910,000 3.8 % (226,500 )
Total debt 883,500 3.0 % 911,864 3.8 % (28,364 )
Shareholders' equity 570,861 915,413 (344,552 )
Total capital $ 1,454,361 $ 1,827,277 $ (372,916 )
(1) The fixed interest rate amount as of December 31, 2019 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. The fixed interest rate amount as of December 31,
2018 represents amounts outstanding under capital lease obligations. Upon
adoption of Accounting Standards Update (ASU) No. 2016-02, Leasing, and related
amendments on January 1, 2019 , we reclassified our capital lease obligations,
now known as finance lease obligations, to accrued liabilities and other
non-current liabilities on the consolidated balance sheet.
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. During 2019, we repurchased 2.6 million
shares for $118.5 million . As of December 31, 2019 , $301.5 million remained
available for repurchase under the authorization. Information regarding changes
in shareholders' equity can be found in the consolidated statements of
shareholders' equity appearing in Part II, Item 8 of this report.
As of December 31, 2018 , we had a revolving credit facility in the amount of
$950.0 million . In January 2019 , we increased the credit facility by $200.0
million , bringing the total availability to $1.15 billion , subject to increase
under the credit agreement 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 the credit facility 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. We were in compliance with all debt covenants as of
December 31, 2019 , and we expect to remain in compliance with our debt covenants
throughout 2020.
36--------------------------------------------------------------------------------
As of
Total available
Revolving credit facility commitment $ 1,150,000
Amount drawn on revolving credit facility (883,500 )
Outstanding letters of credit(1) (5,408 )
Net available for borrowing as of
(1) We use standby letters of credit primarily to collateralize certain obligations related 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.
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 Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
Acquisitions - The impact of acquisitions on our consolidated balance sheets can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Operating lease assets and liabilities - OnJanuary 1, 2019 , we adopted ASU No. 2016-02, Leasing, and related amendments. Adoption of these standards had a material impact on our consolidated balance sheet, but did not have a significant impact on our consolidated statement of loss or our consolidated statement of cash flows. The most significant impact was the recognition of operating lease assets of$50.8 million , current operating lease liabilities of$13.6 million and non-current operating lease liabilities of$37.4 million as ofJanuary 1, 2019 . Prior periods were not restated upon adoption of these standards. Further information can be found under the caption "Note 2: New accounting pronouncements" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 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 past 3 years can be found under the caption "Note 3: Supplemental balance sheet and cash flow information" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Cash payments made for prepaid product discounts were$25.6 million for 2019,$23.8 million for 2018 and$27.1 million for 2017. 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 discounts due within the next year are included in accrued liabilities on our consolidated balance sheets. These accruals were$14.7 million as ofDecember 31, 2019 and$10.9 million as ofDecember 31, 2018 . Accruals for prepaid product discounts included in other non-current liabilities on our consolidated balance sheets were$3.7 million as ofDecember 31, 2019 and$12.5 million as ofDecember 31, 2018 .
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
37
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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 December 31, 2019 or
December 31, 2018 . Further information regarding our liabilities related to
self-insurance and litigation can be found under the caption "Note 17: Other
commitments and contingencies" in the Notes to Consolidated Financial Statements
appearing in the Part II, Item 8 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 nor
have we entered into any material related party transactions during the past 3
years.
As of
2025 and
(in thousands) Total 2020 2021 and 2022 2023 and 2024 thereafter
Long-term debt $ 883,500 $ - $ - $ 883,500 $ -
Purchase obligations 144,219 74,913 45,272 17,237 6,797
Operating lease obligations 50,710 13,970 19,731 7,846 9,163
Other non-current liabilities 35,805 19,351 10,888 2,393 3,173
Total contractual obligations $ 1,114,234 $ 108,234 $ 75,891 $ 910,976 $ 19,133
Purchase obligations include amounts due under contracts with third-party
service providers. These contracts are primarily for information technology
services, including cloud computing and professional services contracts related
to the build-out of our technology platforms discussed in Executive Overview.
Purchase obligations also include Direct Checks direct mail advertising
agreements and Financial Services data agreements. We routinely issue purchase
orders to numerous vendors for the purchase of inventory and other supplies.
These purchase orders are not included in the purchase obligations presented
here, as our business partners typically allow us to cancel these purchase
orders as necessary to accommodate business needs. Of the purchase obligations
included in the table above, $78.2 million allow for early termination upon the
payment of early termination fees. If we were to terminate these agreements, we
would have incurred early termination fees of $6.7 million as of December 31,
2019 .
Other non-current liabilities on our consolidated balance sheets consist
primarily of liabilities for uncertain tax positions, deferred compensation,
prepaid product discounts and our postretirement pension plan. Of the $32.5
million reported as other non-current liabilities on our consolidated balance
sheet as of December 31, 2019 , $16.1 million is excluded from the obligations
shown in the table above. The excluded amounts, including the current portion of
each liability, are comprised primarily of the following:
• Payments for uncertain tax positions - Due to the nature of the underlying
liabilities and the extended time frame often needed to resolve income tax
uncertainties, we cannot make reliable estimates of the amount or timing
of cash payments that may be required to settle these liabilities. Our
liability for uncertain tax positions, including accrued interest and
penalties, was $5.1 million as of December 31, 2019 , excluding taxbenefits of deductible interest and the federal benefit of deductible
state income tax.
• A portion of the amount due under our deferred compensation plan - Under
this plan, some employees may begin receiving payments upon the
termination of employment or disability, and we cannot predict when these
events will occur. As such,
liability as of December 31, 2019 is excluded from the obligations shown
in the table above.
• Other non-current liabilities which are not settled in cash, such as
incentive compensation that will be settled by issuing shares of our
common stock and deferred revenue.
The table of contractual obligations does not include the following:
• Benefit payments for our postretirement medical benefit plan - We have the
option of paying benefits from the accumulated assets of the plan or from
the general funds of the company. Additionally, we expect the plan assets
to earn income over time. As such, we cannot predict when or if payments
from our general funds will be required. We anticipate that we will
utilize plan assets to pay a majority of our benefits during 2020. Our
postretirement benefit plan was overfunded $56.7 million as of
December 31, 2019 .
• Income tax payments, which are dependent upon our taxable income.
38
--------------------------------------------------------------------------------CRITICAL ACCOUNTING POLICIES Our critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations, or which place the most significant demands on management's judgment about the effect of matters that are inherently uncertain, and the impact of different estimates or assumptions could be material to our financial condition or results of operations. Our MD&A discussion is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. Our accounting policies are discussed under the caption "Note 1: Significant accounting policies" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying values of assets and liabilities. In some instances, we reasonably could have used different accounting estimates and, in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results may differ from our estimates. Significant estimates and judgments utilized are reviewed by management on an ongoing basis and by the audit committee of our board of directors at the end of each quarter prior to the public release of our financial results.
Goodwill Impairment
As ofDecember 31, 2019 , goodwill totaled$804.5 million , which represented 41.4% of our total assets.Goodwill is tested for impairment on an annual basis as ofJuly 31 , or more frequently if events occur or circumstances change that would indicate a possible impairment. To analyze goodwill for impairment, we must assign our goodwill to individual reporting units. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form 1 reporting unit if the components have similar economic characteristics. We periodically review our reporting units to ensure that they continue to reflect the manner in which we operate our business. In completing the 2019 annual impairment analysis of goodwill, we elected to perform a qualitative analysis for 4 of our reporting units and a quantitative assessment for 2 of our reporting units: Financial Services Data-Driven Marketing and Small Business Services Web Services. Financial Services Data-Driven Marketing includes our businesses that provide outsourced marketing campaign targeting and execution and marketing analytics solutions. Small Business Services Web Services includes our businesses that provide hosting and domain name services, logo and web design, search engine marketing and optimization, payroll services and business incorporation and organization services. The qualitative analyses 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 analyses completed as ofJuly 31, 2017 , which indicated that the estimated fair values of the 4 reporting units exceeded their carrying values by approximate amounts between$64.0 million and$1.4 billion , or by amounts between 50% and 314% above the carrying values of their net assets. In completing these assessments, we noted no changes in events or circumstance that indicated that it was more likely than not that the fair value of any reporting unit was less than its carrying amount. The quantitative analyses as ofJuly 31, 2019 indicated that the goodwill of our Financial Services Data-Driven Marketing reporting unit was partially impaired and the goodwill of our Small Business Services Web Services reporting unit was fully impaired. As such, we recorded pretax goodwill impairment charges of$115.5 million and$242.3 million , respectively. Both impairment charges resulted from a combination of triggering events and circumstances, including underperformance against 2019 expectations and the original acquisition business case assumptions, driven substantially by our decision in the third quarter of 2019 to exit certain customer contracts, the loss of certain large customers in the third quarter of 2019 as they elected to in-source some of the services we provide, and the sustained decline in our stock price. 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,$70.9 million of goodwill remained in the Financial Services Data-Driven Marketing reporting unit. Our impairment assessments are sensitive to changes in forecasted revenues and expenses, as well as our selected discount rate. For the Financial Services Data-Driven Marketing reporting unit, holding all other assumptions constant, if we assumed revenue in each year was 10% higher than we estimated, our impairment charge would have been approximately$16.0 million less, and if we assumed revenue in each year was 10% lower than we estimated, our impairment charge would have been approximately$17.0 million more. If we assumed our expenses, as a percentage of revenue, were 200 basis points lower in each year, our impairment charge would have been approximately$28.0 million less, and if we assumed our expenses, as a percentage of revenue, were 200 basis points higher in each year, our impairment charge would have been approximately 39 --------------------------------------------------------------------------------$30.0 million more. If we assumed our selected discount rate of 12% was 200 basis points lower, our impairment charge would have been approximately$43.0 million less, and if we assumed the discount rate was 200 basis points higher, our impairment charge would have been approximately$28.0 million more. In the case of the Small Business Services Web Services reporting unit, holding all other assumptions constant, if we assumed revenue in each year was 10% higher than we estimated, our impairment charge would have been approximately$6.0 million less. If we assumed our expenses, as a percentage of revenue, were 200 basis points lower in each year, our impairment charge would have been approximately$35.0 million less, and if we assumed our selected discount rate of 12% was 200 basis points lower, our impairment charge would have been approximately$12.0 million less. In completing the quantitative analyses of goodwill, we first compared the carrying value of the reporting unit, including goodwill, to its estimated fair value. Carrying value is based on the assets and liabilities associated with the operations of the reporting unit, which often requires the allocation of shared and corporate items among reporting units. We used the income approach to calculate the estimated fair value of the reporting unit. This approach is a valuation technique under which we estimated future cash flows using the reporting unit's financial forecast from the perspective of an unrelated market participant. Using historical trending and internal forecasting techniques, we projected revenue and applied our fixed and variable cost experience rates to the projected revenue to arrive at the future cash flows. A terminal value was then applied to the projected cash flow stream. Future estimated cash flows were discounted to their present value to calculate the estimated fair value. The discount rate used was the market-value-weighted average of our estimated cost of capital derived using both known and estimated customary market metrics. In determining the estimated fair value of a reporting unit, we are required to estimate a number of factors, including market factors specific to the business, revenue growth rates, economic conditions, anticipated future cash flows, terminal growth rates, the discount rate, direct costs and the allocation of shared and corporate items. When completing a quantitative analysis for all of our reporting units, the summation of our reporting units' fair values is compared to our consolidated fair value, as indicated by our market capitalization, to evaluate the reasonableness of our calculations. Evaluations of asset impairment require us to make assumptions about future events, market conditions and financial performance over the life of the asset being evaluated. These assumptions require significant judgment and actual results may vary from our assumptions. For example, if our stock price were to further decline over a sustained period, if a downturn in economic conditions were to negatively affect our actual and forecasted operating results, if we were to change our business strategies and/or the allocation of resources, if we were to lose significant customers, if competition were to increase, or if order volume declines for checks and forms were to materially accelerate, these situations could indicate a decline in the fair value of one or more of our reporting units. This may require us to record additional impairment charges for a portion of goodwill or other assets.
Information regarding our 2018 and 2017 impairment analyses can be found under the caption "Note 8: Fair value measurements" in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.
Business Combinations
We allocate the purchase price of acquired businesses to the estimated fair
values of the assets acquired and liabilities assumed as of the date of the
acquisition. The calculations used to determine the fair value of the long-lived
assets acquired, primarily intangible assets, can be complex and require
significant judgment. We weigh many factors when completing these estimates,
including, but not limited to, the nature of the acquired company's business;
its competitive position, strengths, and challenges; its historical financial
position and performance; estimated customer retention rates; discount rates;
and future plans for the combined entity. We may also engage independent
valuation specialists, when necessary, to assist in the fair value calculations
for significant acquired long-lived assets.
We generally estimate the fair value of acquired customer lists using the
multi-period excess earnings method. This valuation model estimates revenues and
cash flows derived from the asset and then deducts portions of the cash flow
that can be attributed to supporting assets, such as a trade name or fixed
assets, that contributed to the generation of the cash flows. The resulting cash
flow, which is attributable solely to the customer list asset, is then
discounted at a rate of return commensurate with the risk of the asset to
calculate a present value. The fair value of acquired customer lists may also be
estimated by discounting the estimated cash flows expected to be generated by
the assets. Assumptions used in these calculations include same-customer revenue
growth rates, estimated earnings, estimated customer retention rates based on
the acquirees' historical information and the discount rate.
The fair value of acquired trade names and technology is estimated, at times,
using the relief from royalty method, which calculates the cost savings
associated with owning rather than licensing the assets. Assumed royalty rates
are applied to projected revenue for the remaining useful lives of the assets to
estimate the royalty savings. Royalty rates are selected based on the attributes
of the asset, including its recognition and reputation in the industry, and in
the case of trade names, with consideration of the specific profitability of the
products sold under a trade name and supporting assets. The fair value of
acquired technology may also be estimated using the cost of reproduction method
under which the primary components of the technology are identified and the
estimated cost to reproduce the technology is calculated based on historical
data provided by the acquiree.
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The excess of the purchase price over the estimated fair value of the net assets
acquired is recorded as goodwill. Goodwill is not amortized, but is subject to
impairment testing on at least an annual basis.
We are also required to estimate the useful lives of the acquired intangible
assets, which determines the amount of acquisition-related amortization expense
we will record in future periods. Each reporting period, we evaluate the
remaining useful lives of our amortizable intangibles to determine whether
events or circumstances warrant a revision to the remaining period of
amortization.
While we use our best estimates and assumptions, our fair value estimates are
inherently uncertain and subject to refinement. As a result, during the
measurement period, which may be up to 1 year from the acquisition date, we may
record adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. Any adjustments required after the measurement
period are recorded in the consolidated statements of (loss) income.
The judgments required in determining the estimated fair values and expected
useful lives assigned to each class of assets and liabilities acquired can
significantly affect net income. For example, different classes of assets will
have useful lives that differ. Consequently, to the extent a longer-lived asset
is ascribed greater value than a shorter-lived asset, net income in a given
period may be higher. Additionally, assigning a lower value to amortizable
intangibles would result in a higher amount assigned to goodwill. As goodwill is
not amortized, this would benefit net income in a given period, although
goodwill is subject to annual impairment analysis.
Income Taxes
When preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense based on expected taxable income, statutory tax rates, tax credits allowed in the various jurisdictions in which we operate, and risks associated with uncertain tax positions, together with assessing temporary and permanent differences resulting from the differing treatment of certain items between income tax return and financial reporting requirements. In interim reporting periods, we use an estimate of our annual effective tax rate based on the facts available at the time. Changes in the jurisdictional mix or the estimated amount of annual pretax income could impact our estimated effective tax rate for interim periods. The actual effective income tax rate is calculated at the end of the year. We recognize deferred tax assets and liabilities for temporary differences using the enacted tax rates and laws that will be in effect when we expect the temporary differences to reverse. We must assess the likelihood that our deferred tax assets will be realized through future taxable income, and to the extent we believe that realization is not likely, we must establish a valuation allowance against those deferred tax assets. Judgment is required in evaluating our tax positions, and in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We had net deferred tax liabilities of$11.0 million as ofDecember 31, 2019 , including valuation allowances of$10.3 million . We are subject to tax audits in numerous domestic and foreign tax jurisdictions. Tax audits are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service and other tax authorities regarding the amount of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. We recognize the benefits of tax return positions in the financial statements when they are more-likely-than-not to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that, in our judgment, is greater than 50% likely to be realized. As ofDecember 31, 2019 , our liability for uncertain tax positions, including accrued interest and penalties, was$5.1 million , excluding tax benefits of deductible interest and the federal benefit of deductible state income tax. Further information regarding our unrecognized tax benefits can be found under the caption "Note 11: Income tax provision" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable settlement of any particular issue would require the use of cash and could result in increased income tax expense. Favorable resolution would result in reduced income tax expense. InDecember 2017 ,U.S. tax reform was signed into law under the 2017 Tax Act. This legislation included a broad range of tax reforms, including changes to corporate tax rates, business deductions and international tax provisions. The tax effects of changes in tax laws or rates must be recognized in the period in which the law is enacted. As such, this legislation resulted in a net benefit of approximately$20.5 million to our 2017 income tax provision. This amount included the net tax benefit from the remeasurement of deferred income taxes to the new federal statutory tax rate of 21%, which was effective for us onJanuary 1, 2018 , and revised state income tax rates for those states expected to follow the provisions of the 2017 Tax Act, partially offset by the establishment of a liability for the repatriation toll charge related to undistributed foreign earnings and profits. When recording the impact of the 2017 Tax Act during 2017, we used reasonable estimates to determine many of the impacts, including our 2017 deferred activity and the amount of post-1986 unremitted foreign earnings subject to the repatriation toll charge. We refined our calculations throughout 2018 and recorded an additional net benefit of$1.7 million to our 2018 income tax provision, primarily due to a reduction in the amount accrued for the repatriation toll charge. 41 -------------------------------------------------------------------------------- A one-percentage-point change in our effective income tax rate would have resulted in a$1.9 million change in income tax expense for 2019. The determination of our provision for income taxes, deferred income taxes and unrecognized tax positions requires judgment, the use of estimates, and the interpretation and application of complex tax laws. As such, the amounts reflected in our consolidated financial statements may require adjustment in the future as additional facts become known or circumstances change. If actual results differ from estimated amounts, our effective income tax rate and related tax balances would be affected.
Revenue Recognition
EffectiveJanuary 1, 2018 , we implemented ASU No. 2014-09, Revenue from Contracts with Customers, and related amendments. Under this guidance, our product revenue is recognized when control of the goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods. In most cases, control is transferred when products are shipped. We recognize the vast majority of our service revenue as the services are provided. The majority of our contracts are for the shipment of tangible products or the delivery of services that have a single performance obligation or include multiple performance obligations where control is transferred at the same time. Many of our financial institution contracts require prepaid product discounts in the form of cash payments we make to our financial institution clients. These prepaid product discounts are included in other non-current assets on our consolidated balance sheets and are generally amortized as reductions of revenue on the straight-line basis over the contract term. Sales tax collected concurrent with revenue-producing activities is excluded from revenue. Amounts billed to customers for shipping and handling are included in revenue, while the related costs incurred for shipping and handling are reflected in cost of products and are accrued when the related revenue is recognized. When another party is involved in providing goods or services to a customer, we must determine whether our obligation is to provide the specified good or service itself (i.e., we are the principal in the transaction) or to arrange for that good or service to be provided by the other party (i.e., we are an agent in the transaction). When we are responsible for satisfying a performance obligation, based on our ability to control the product or service provided, we are considered the principal and revenue is recognized for the gross amount of consideration. When the other party is primarily responsible for satisfying a performance obligation, we are considered the agent and revenue is recognized in the amount of any fee or commission to which we are entitled. Within our Small Business Services segment, we sell certain products and services through a network of Safeguard distributors. We have determined that we are the principal in these transactions and revenue is recorded for the gross amount of consideration. When a customer pays in advance, primarily for treasury management solutions and web hosting services, we defer the revenue and recognize it as the services are performed, generally over a period of less than 1 year. Certain of our contracts for data-driven marketing solutions and treasury management outsourcing services within Financial Services have variable consideration that is contingent on either the success of the marketing campaign ("pay-for-performance") or the volume of outsourcing services provided. We recognize revenue for estimated variable consideration as services are provided based on the most likely amount to be realized. Revenue is recognized to the extent that it is probable that a significant reversal of revenue will not occur when the contingency is resolved. Typically, the amount of consideration for these contracts is finalized within 4 months, although pricing under certain of our outsourcing contracts may be based on annual volume commitments. Revenue recognized from these contracts was approximately$200.0 million in 2019. Certain costs incurred to obtain contracts are required to be recognized as assets and amortized consistent with the transfer of goods or services to the customer. As such, we defer sales commissions related to obtaining check supply and treasury management solution contracts within Financial Services. These amounts are included in other non-current assets and are amortized on the straight-line basis as SG&A expense. Amortization of these amounts on the straight-line basis approximates the timing of the transfer of goods or services to the customer. Generally, these amounts are being amortized over periods of 3 to 5 years. We expense sales commissions as incurred when the amortization period would have been 1 year or less. Accounting for customer contracts can be complex and may involve the use of various techniques to estimate total contract revenue. Estimates related to variable consideration are based on various assumptions to project the outcome of future events. We review and update our contract-related estimates regularly, and we do not anticipate that revisions to our estimates would have a material effect on our results of operations, financial position or cash flows.
New Accounting Pronouncements
Information regarding the accounting pronouncements adopted during 2019 and those not yet adopted can be found under the caption "Note 2: New accounting pronouncements" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. OnJanuary 1, 2020 , we adopted ASU No. 2018-15, Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This standard requires the capitalization, as non-current assets, of implementation costs related to cloud computing arrangements. Previously, we expensed these costs. As discussed in Executive Overview, we are investing significant resources to build out our technology platforms. We anticipate that we may capitalize up to$50.0 million of cloud computing implementation costs in 2020 related to these investments. 42
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