Deluxe Corporation — Q1 2024 Form 10-Q
Business context and period: Unaudited results for the quarter ended March 31, 2024, compared with Q1 2023. Deluxe provides payment, data, marketing and print products and services. Effective January 1, 2024, it reorganized its reportable segments; 2023 segment comparisons were recast. Amounts below are in U.S. dollars.
Financial results
| Metric | Q1 2024 | Q1 2023 / prior date |
|---|---|---|
| Revenue | $535.0 million | $545.4 million; down 1.9% |
| Gross profit / margin | $283.5 million / 53.0% | $294.7 million / 54.0% |
| Operating income | $44.2 million | $34.1 million |
| Net income attributable to Deluxe | $10.8 million | $2.8 million |
| GAAP diluted EPS | $0.24 | $0.06 |
| Adjusted diluted EPS (non-GAAP) | $0.76 | $0.80 |
| Adjusted EBITDA / margin (non-GAAP) | $100.5 million / 18.8% | $100.4 million / 18.4% |
| Operating cash flow / free cash flow (non-GAAP) | $26.6 million / $6.1 million | $(6.7) million / $(32.2) million |
| Cash and cash equivalents | $23.5 million | $72.0 million at Dec. 31, 2023 |
| Total debt, net of discounts and issuance costs | $1.560 billion | $1.593 billion at Dec. 31, 2023 |
| Net debt / liquidity (non-GAAP) | $1.537 billion / $275.8 million | $1.521 billion / $312.5 million at Dec. 31, 2023 |
Cash and cash equivalents exclude restricted cash held for customers. Liquidity is cash plus $252.2 million available under the revolving facility. Q1 cash flow from financing was $(326.6) million, including a $272.8 million net reduction in customer-funds obligations, which the company says is seasonal. Capital expenditures were $20.4 million; dividends paid were $14.0 million.
Changes and segment performance
- Revenue declined mainly due to business exits, secular declines in checks and business forms, and lower treasury-management volumes; growth in Merchant Services and Data Solutions and pricing actions partly offset the declines.
- GAAP net income and EPS rose substantially, reflecting lower SG&A, an $8.6 million gain on sales, and a lower effective tax rate versus Q1 2023. Adjusted diluted EPS declined 5%, as ongoing print-market declines, inflation and business exits outweighed pricing, cost actions and growth in selected segments.
- Merchant Services revenue increased 8.3% to $96.5 million; adjusted EBITDA increased 16.3% to $21.4 million. B2B Payments revenue decreased 7.7% to $69.4 million and adjusted EBITDA decreased 1.6% to $13.3 million. Data Solutions revenue rose 34.6% to $59.7 million and adjusted EBITDA rose 45.0% to $14.9 million. Print revenue decreased 3.4% to $303.3 million and adjusted EBITDA decreased 4.5% to $91.0 million.
- The payroll and HR customer transition and the 2023 sale of web hosting and logo-design businesses contributed to lower revenue. The exiting payroll and HR businesses generated approximately $27 million of 2023 revenue.
Outlook, management commentary and risks
- 2024 guidance, excluding the payroll and HR business being exited: revenue of $2.14–$2.18 billion and adjusted EBITDA of $400–$420 million. Management cautions that these non-GAAP outlook measures are not reconciled to GAAP because reconciling items are uncertain and may be material.
- Management expects about $100 million in 2024 capital expenditures and to continue regular quarterly dividends, subject to board approval. It expects operating cash generation, cash on hand and credit availability to cover operations and debt service for the next 12 months.
- The North Star program targets $80 million of adjusted EBITDA and $100 million of free-cash-flow run-rate improvement by 2026. Approximately $60 million of related costs had been incurred through Q1; another $60–$80 million is expected through 2025. Management estimates 2024 savings from workforce and facility actions, while warning that inflation and business investments may offset them.
- Debt principal was $1.570 billion, including $65.0 million outstanding under a new receivables securitization facility used to prepay secured term debt. The company reported compliance with debt covenants. Approximately $929 million of principal is scheduled for 2026. A 1-percentage-point change in weighted-average interest rates would change remaining-2024 interest expense by approximately $3 million. Interest-rate swaps fixed the rate on $755.4 million of variable-rate debt.
- Management cites inflation in labor, materials and delivery; labor and supply disruptions; secular declines in print products; treasury lockbox volume pressure; and campaign-timing volatility in Data Solutions. It expects the payroll/HR reporting unit’s $7.7 million goodwill balance to be fully impaired during 2024 as the exit progresses. Recorded litigation liabilities were not material, though the filing notes adverse rulings could have a material effect. No significant changes to the previously disclosed risk factors were reported.
Investor verification priorities
- Track the 2024 revenue and adjusted EBITDA outlook against results, noting the exclusion of the payroll/HR exit and the non-GAAP basis.
- Assess recurring operating cash generation and working-capital movements separately from seasonal customer-fund flows and restricted cash.
- Monitor debt reduction, interest expense, 2026 maturities, covenant headroom and continued access to revolving and securitization facilities.
- Evaluate whether North Star savings materialize and whether restructuring costs, inflation and the anticipated goodwill impairment affect reported and adjusted results.
- Review the sustainability of growth in Merchant Services and Data Solutions against ongoing print declines and B2B Payments’ transition to recurring revenue.