Deluxe Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results; financial amounts below are in U.S. dollars. Unless stated otherwise, amounts are in millions.
Business context
Deluxe provides payments, treasury management, cloud and data-driven marketing, promotional products, checks and business forms through four segments: Payments, Cloud Solutions, Promotional Solutions and Checks. First American Payment Systems, acquired in June 2021, contributed to Payments results. During 2022, Deluxe sold its Australian web hosting business and two Promotional Solutions businesses.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $555.0 | $532.1 | $1,674.0 | $1,451.6 |
| Gross profit | $298.8 | $288.0 | $904.5 | $822.4 |
| Gross margin | 53.8% | 54.1% | 54.0% | 56.7% |
| Operating income | $41.6 | $36.4 | $124.1 | $98.8 |
| Net income | $14.8 | $12.5 | $46.5 | $49.0 |
| Diluted EPS | $0.34 | $0.28 | $1.06 | $1.13 |
| Adjusted diluted EPS | $0.99 | $1.10 | $3.04 | $3.62 |
| Adjusted EBITDA / margin | $104.6 / 18.8% | $102.7 / 19.3% | $305.9 / 18.3% | $290.7 / 20.0% |
Q3 revenue increased 4.3%; nine-month revenue rose 15.3%, including $144.2 million of incremental First American revenue. Q3 net income and diluted EPS increased, while adjusted diluted EPS fell 10.0%. For the nine-month period, net income declined 4.9%, diluted EPS declined 6.2% and adjusted diluted EPS declined 16.0%. Interest expense was $23.8 million in Q3 and $65.5 million year to date; the nine-month increase was 84.2%.
For the nine months, operating cash flow was $123.4 million, down from $149.2 million, and free cash flow was $50.0 million, down from $68.1 million. Capital expenditures were $73.5 million. The company attributed weaker cash generation mainly to increased interest, performance-based compensation and income tax payments.
At September 30, cash and cash equivalents were $45.5 million. Total debt principal was $1.687 billion (carrying amount, net of discount and issuance costs, was $1.671 billion); net debt was $1.625 billion. Available revolving credit was $282.2 million and reported liquidity was $327.7 million. Debt maturities include $937.5 million in 2026. The company reported compliance with its debt covenants.
Current assets were $550.4 million and current liabilities were $585.8 million. Funds held for customers and the corresponding liability fell by about $99 million and $101 million, respectively, from year-end, primarily due to seasonal customer property-tax activity.
Material changes and management commentary
- Revenue growth reflected First American, new business, demand and price increases. These gains were partly offset by secular declines in checks, forms and some accessories, and divestitures.
- Adjusted EBITDA margin declined year over year, particularly year to date, amid inflation in labor, materials and delivery, technology investments, product-mix changes and supply disruptions affecting higher-margin Promotional Solutions products. Management reported improved supply availability in Q3.
- Payments revenue increased 5.9% in Q3 and 47.8% year to date; the latter included First American. Cloud Solutions revenue declined 4.0% in Q3, while year-to-date revenue rose 2.5%. Promotional Solutions and Checks revenue rose 4.4% and 6.0% in Q3, respectively.
- Q3 restructuring and integration expense was $15.3 million; nine-month expense was $46.8 million. The majority of related employee reductions and severance payments were expected to be completed by mid-2023.
- Business and facility sales generated $19.3 million of pretax gains in the first nine months. In Q3, Deluxe also recognized a $1.7 million pretax gain on debt retirements after purchasing $25.0 million of its senior notes.
Outlook, risks and contingencies
- For 2022, management expected revenue growth of 8%–10% and adjusted EBITDA margin of approximately 18.5%–19.0%. Business exits were expected to reduce full-year revenue growth by about 2 percentage points. These are management forecasts, not guarantees; the filing does not provide a reconciliation of the adjusted EBITDA margin outlook to GAAP.
- Expected 2022 capital expenditures were approximately $105 million. Management anticipated continuing the regular quarterly dividend and stated that available resources should support operations and debt service for the next 12 months; dividends remain subject to board approval.
- Management cited uncertainty from macroeconomic conditions, inflation, labor availability, supply-chain disruption, ongoing secular product declines and rising interest rates. A one-percentage-point change in the weighted-average rate on variable-rate debt would have changed nine-month interest expense by an estimated $7.3 million. Interest-rate swaps fixed rates on $500 million of variable-rate debt.
- First American subsidiaries agreed to a $4.9 million FTC payment and injunctive relief under an order approved in July 2022. The payment and related post-closing expenses were to be drawn from an acquisition indemnity holdback; Deluxe said the matter would not materially affect its consolidated financial statements.
- Recorded legal liabilities were not material, though the company cautioned that litigation has inherent uncertainties. Management reported no significant changes to the risk factors in its 2021 Form 10-K and no goodwill impairment from its 2022 annual analysis.
Important facts for investors to verify
- How much reported growth and future performance depend on First American versus organic growth, pricing and business exits.
- Whether margin pressure from inflation, technology spending and Promotional Solutions supply constraints eases as management expected.
- Debt repayment capacity, refinancing needs around 2026, covenant headroom and the effect of further interest-rate changes.
- Whether operating cash flow and free cash flow recover, given higher interest, taxes, compensation payments and capital spending.
- Progress against 2022 revenue and adjusted EBITDA margin guidance, and the assumptions behind those non-GAAP forecasts.