Deluxe Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing reports annual results and unaudited quarterly data; fourth-quarter figures are noted below. Deluxe provides payments, cloud and data services, promotional products, forms, and printed checks, primarily in the U.S. Effective January 1, 2020, it reorganized reporting into Payments, Cloud Solutions, Promotional Solutions, and Checks.
Financial performance and key metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,790.8 million | $2,008.7 million |
| Gross profit / margin | $1,060.0 million / 59.2% | $1,195.8 million / 59.5% |
| Operating income (loss) / margin | $44.5 million / 2.5% | $(158.1) million / (7.9)% |
| Net income (loss) attributable to Deluxe | $8.8 million; diluted EPS $0.19 | $(199.9) million; diluted EPS $(4.65) |
| Adjusted diluted EPS (non-GAAP) | $5.08 | $6.82 |
| Adjusted EBITDA and margin (non-GAAP) | $364.5 million / 20.4% | $480.9 million / 23.9% |
| Cash from operations / free cash flow (non-GAAP) | $217.6 million / $154.9 million | $286.7 million / $220.1 million |
| Cash and cash equivalents | $123.1 million | $73.6 million |
| Total debt / net debt (non-GAAP) | $840.0 million / $716.9 million | $883.5 million / $809.9 million |
FY2020 revenue fell 10.8%. Service revenue was 31.3% of total revenue, up from 29.8% in 2019. The GAAP effective tax rate was 70.9%, unusually high mainly because a portion of goodwill impairment charges was nondeductible. Fourth-quarter revenue was $454.5 million versus $522.1 million in Q4 2019; net income attributable to Deluxe was $24.7 million versus $44.8 million.
Segments
| Segment | FY2020 revenue | Change vs. 2019 | FY2020 adjusted EBITDA / margin |
|---|---|---|---|
| Payments | $301.9 million | +12.0% | $68.1 million / 22.6% |
| Cloud Solutions | $252.8 million | (20.6)% | $61.6 million / 24.4% |
| Promotional Solutions | $529.6 million | (17.4)% | $66.6 million / 12.6% |
| Checks | $706.5 million | (9.4)% | $341.7 million / 48.4% |
Payments growth was led by treasury management revenue, up 16.8%, including lockbox outsourcing deals and new clients. Promotional Solutions, Checks, and Cloud Solutions were adversely affected by pandemic-related demand weakness. Checks remained the largest segment, at 39.4% of company revenue.
Material changes and unusual items
- COVID-19 reduced demand, particularly for promotional products, checks, and data-driven marketing; it also reduced payroll services revenue and delayed some Payments client implementations. Revenue impact was most severe in April, then improved, with results stabilizing in the second half. PPE sales contributed $31.0 million of 2020 revenue.
- FY2020 included $98.0 million of asset impairment charges, primarily goodwill in Promotional Solutions and Cloud Solutions Web Hosting and certain intangibles. FY2019 included $391.0 million of impairment charges, making the year-over-year GAAP earnings comparison substantially affected by impairments.
- Restructuring, integration, and other costs totaled $79.3 million in 2020. Deluxe closed 24 facilities during the year and expected further closures in 2021. It projected more than $10 million of annual savings once the facility closures are complete.
- Management cited approximately $50 million of 2020 investment supporting the One Deluxe transformation. COVID-related incremental costs were approximately $8 million. Cost actions, including temporary salary reductions, suspended 401(k) matching, furloughs, and discretionary spending cuts, generated approximately $33 million of savings; temporary salary reductions ended July 1, 2020.
- Deluxe drew an additional $238 million on its revolving facility in March 2020, then repaid $300 million of the amount drawn during the second half. Share repurchases were suspended for most of the year; $14 million of shares were repurchased in Q1.
Liquidity, outlook, and risks
At year-end, reported liquidity was $425.5 million, comprising $123.1 million of cash and $302.3 million available under the $1.15 billion revolving credit facility. The facility matures in March 2023; $840 million was outstanding, at a 2.0% period-end rate. A $200 million portion was effectively fixed through an interest-rate swap. The company reported compliance with debt covenants and expected to remain compliant over the next 12 months. Management said cash generation, cash on hand, and facility availability should fund operations for that period. Funds held for customers are separately reported and should not be treated as unrestricted corporate cash.
For 2021, management forecast sales-driven revenue growth of 0%–2%, adjusted EBITDA margin of 20%–21%, and an effective tax rate of approximately 25%. It expected Q1 performance to be similar to Q4 2020, recovery to begin in Q2, and revenue growth to reach the mid-single digits exiting the year. Planned capital expenditures were approximately $90 million. Management expected to continue the quarterly dividend, subject to board approval. These forecasts depend on economic recovery and continued execution; the filing did not provide a reconciliation of adjusted EBITDA guidance to GAAP because of uncertainty around reconciling items.
- Principal risks: continuing COVID-19 effects and small-business failures; secular declines in checks and business forms; intense competition and pricing pressure; execution risk in technology, sales, and transformation investments; and potential additional goodwill or other asset impairments.
- Other exposures: cybersecurity incidents, system or third-party service interruptions, variable-rate debt, regulatory and privacy compliance, materials and supplier costs, and credit exposure to Promotional Solutions distributors. A one-percentage-point change in weighted-average interest rates would have changed 2020 interest expense by approximately $8.2 million.
- Contingencies: management said recorded legal liabilities were not material and did not expect currently identified claims to materially affect results, while noting litigation outcomes remain uncertain. Distributor loans and notes receivable totaled $37.1 million gross, with $4.0 million of allowances for expected credit losses.
Important facts for investors to verify
- Whether 2021 revenue and margin guidance was achieved, and how much recovery was driven by underlying demand versus comparisons with pandemic-affected periods.
- Whether treasury management growth and other newer businesses can offset declining checks, forms, and promotional demand, including the longer-term trajectory of the Checks segment.
- Cash conversion, capital spending, debt reduction, covenant headroom, and the sustainability of the dividend alongside the planned transformation investments.
- Whether pandemic-related assumptions, distributor credit quality, and reporting-unit forecasts lead to further impairment or credit-loss charges; goodwill was $736.8 million, about 39% of total assets.
- The sustainability of reported adjusted EPS and adjusted EBITDA, which exclude material impairment, restructuring, and other items and are non-GAAP measures.