Deluxe Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report; the filing provides limited selected Q4 information.
Business context
Deluxe is transitioning from a check-printing company to a payments and business-technology provider. Its four segments are Payments, Cloud Solutions, Promotional Solutions and Checks. In June 2021, Deluxe acquired First American Payment Systems, expanding merchant payment processing. Checks remained the largest segment, while management said Payments revenue was expected to equal Checks in 2022.
Key financial results
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $2.022 billion | $1.791 billion |
| Gross profit / gross margin | $1.138 billion / 56.3% | $1.060 billion / 59.2% |
| Operating income | $142.2 million | $40.7 million |
| Net income attributable to Deluxe | $62.6 million | $5.2 million |
| Diluted EPS | $1.45 | $0.11 |
| Adjusted diluted EPS (non-GAAP) | $4.88 | $5.08 |
| Adjusted EBITDA / margin (non-GAAP) | $407.8 million / 20.2% | $364.5 million / 20.4% |
| Operating cash flow | $210.8 million | $217.6 million |
| Capital expenditures / free cash flow (non-GAAP) | $109.1 million / $101.7 million | $62.6 million / $154.9 million |
| Cash and cash equivalents | $41.2 million | $123.1 million |
| Total debt principal / net debt (non-GAAP) | $1.702 billion / $1.642 billion | $840.0 million / $716.9 million |
| Liquidity (cash plus revolver availability; non-GAAP) | $403.9 million | $425.5 million |
Revenue grew 12.9%, including $195.0 million from First American. Service revenue rose to 38.5% of sales from 31.3%. Cost of revenue rose faster than sales, with its share of revenue increasing 2.9 percentage points, reflecting acquisition-related costs and amortization, inflation and customer mix. Net income improved substantially versus 2020, in part because 2021 had no asset impairment charge; 2020 included $101.7 million of impairment charges. Adjusted diluted EPS declined despite higher adjusted EBITDA.
Segment revenue and adjusted EBITDA: Payments, $510.4 million and $105.6 million; Cloud Solutions, $262.3 million and $70.2 million; Promotional Solutions, $546.5 million and $85.4 million; Checks, $703.1 million and $324.2 million. Payments revenue rose 69.0%, principally due to First American. Checks revenue declined 0.5%, reflecting the ongoing secular decline partly offset by recovery, new clients and pricing.
Material changes, financing and unusual items
- First American was acquired for $958.5 million net of acquired cash. It contributed $195.0 million in revenue and $39.1 million in Payments adjusted EBITDA after acquisition. The preliminary purchase-price allocation included $727.2 million of goodwill and $291.1 million of intangible assets.
- Debt increased substantially to fund the acquisition. Deluxe issued $500 million of 8.0% senior unsecured notes and entered a new credit agreement with a $1.155 billion term loan and a $500 million revolving facility. At year-end, $362.6 million was available under the revolver; $1.0 billion of debt was variable-rate. A one-percentage-point change in weighted-average rates would have changed 2021 interest expense by $9.1 million, based on the filing’s calculation.
- During the second half of 2021, Deluxe repaid $152.9 million of net debt. It repatriated $85.3 million of Canadian cash and recorded $4.6 million of related tax expense. The regular dividend was $1.20 per share for the year; no shares were repurchased in 2021.
- Free cash flow fell $53.2 million year over year, mainly as capital purchases rose by $46.5 million for technology and other growth investment. Operating cash flow decreased $6.7 million.
- Management revised the 2019 and 2020 financial statements presented in this filing after identifying errors in prior goodwill impairment calculations. It said the errors were not material to previously filed statements and did not require amendments. The revision increased reported impairment charges and losses and reduced goodwill and equity for those periods.
- Fourth-quarter 2021 selected items included $17.9 million of restructuring and integration expense and $4.2 million of discrete income tax expense, primarily related to Canadian cash repatriation.
Outlook, management commentary and risks
For 2022, management expected revenue growth of 8%–10%, including a full year of First American, and adjusted EBITDA margin of approximately 20.0%. It anticipated approximately $105 million of capital expenditures and continued quarterly dividends, subject to board approval. Management expected lower first-quarter margins, improving as the year progressed, and said operating cash flow, cash on hand and revolver availability should cover operations, contractual commitments and debt service for the next 12 months. It expected covenant compliance during 2022.
Segment expectations included high-single-digit Payments revenue growth, mid-single-digit Cloud Solutions growth, low-single-digit Promotional Solutions growth and a low-single-digit Checks revenue decline. Management cited continued uncertainty from COVID-19 and variants, supply-chain constraints, labor availability and inflation. It reported targeted price increases late in 2021 and anticipated ongoing cost pressures.
- FTC investigation: The FTC is investigating certain First American subsidiaries’ business practices under federal consumer and credit-reporting laws. Deluxe said the outcome and possible remedies could not be predicted; acquisition-related indemnification is limited.
- Secular declines and competition: Checks and business forms face long-term volume declines, while payments, cloud and promotional businesses face intense competition and technology change.
- Leverage and interest rates: Debt rose materially, includes variable-rate borrowings and is subject to leverage, interest-coverage and other covenants. The company was compliant at year-end.
- Integration, goodwill and execution: Acquisition integration, anticipated synergies and goodwill valuations carry uncertainty. Goodwill was $1.43 billion, or 46.5% of total assets; no impairment was recorded in 2021.
- Other operating risks: Cybersecurity, service interruptions, third-party providers, regulation, inflation, supply availability, customer credit and the pandemic could adversely affect results. Management reported no material impact from supply-chain issues to date but gave no assurance of continued availability or pricing.
The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. First American was excluded from the 2021 internal-control assessment and audit because it was acquired during the year; its revenue represented 9.6% of consolidated revenue. The auditor identified valuation of First American’s acquired intangible assets as a critical audit matter.
Important facts for investors to verify
- Whether First American’s growth, integration and expected organic revenue benefits continue, and how its acquisition financing affects earnings and debt reduction.
- Progress against the 2022 revenue and adjusted EBITDA margin outlook, including the effects of inflation, labor and supply constraints.
- Checks and forms volume trends, and whether growth in Payments and other businesses offsets those declines.
- The status and potential financial, operational or reputational consequences of the FTC investigation and the scope of available indemnification.
- Debt maturities, variable-rate exposure, covenant headroom, liquidity and the company’s ability to fund capital investment and dividends.
- Effects of the revised goodwill impairment calculations and the assumptions supporting goodwill and acquired intangible-asset valuations.