Deluxe Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Deluxe provides payments, cloud and data, promotional products, and checks and business forms. Results include First American Payment Systems, acquired June 1, 2021.
Financial performance
Amounts are in millions except per-share data. Comparisons are with the corresponding 2021 period.
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $563.0 | $478.2 | $1,119.0 | $919.5 |
| Gross profit / margin | $298.8 / 53.1% | $271.6 / 56.8% | $605.7 / 54.1% | $534.4 / 58.1% |
| Operating income | $51.6 | $26.4 | $82.4 | $62.4 |
| Net income | $22.1 | $12.1 | $31.8 | $36.5 |
| Diluted EPS | $0.50 | $0.28 | $0.72 | $0.85 |
| Adjusted EBITDA / margin (non-GAAP) | $101.7 / 18.1% | $97.5 / 20.4% | $201.4 / 18.0% | $188.0 / 20.4% |
| Adjusted diluted EPS (non-GAAP) | $0.99 | $1.25 | $2.05 | $2.51 |
First-half operating cash flow was $72.2 million, down from $83.8 million; free cash flow, as defined by the company, was $26.9 million versus $37.2 million. Capital expenditures were $45.2 million. Cash dividends paid were $26.6 million.
At June 30, principal debt was $1.693 billion (carrying value, net of fees and discounts, $1.676 billion); net debt was $1.632 billion. Cash and cash equivalents were $43.3 million, and availability on the revolving credit facility was $315.7 million, for company-defined liquidity of $358.9 million. The company reported compliance with debt covenants.
Material changes and drivers
- Revenue increased 17.7% in Q2 and 21.7% in the first half. First American contributed incremental revenue of $61.0 million in Q2 and $144.2 million in the first half; growth also reflected new business, demand, and pricing. Business exits reduced revenue by $7.4 million in the periods reported.
- Q2 net income rose, but included $17.5 million of pretax gains on business and facility sales. First-half net income and GAAP diluted EPS declined year over year, reflecting higher interest and amortization expense, technology and other transformation investments, inflation, supply disruptions, and secular declines in checks and forms.
- Q2 interest expense was $21.3 million, compared with $9.5 million; first-half interest expense was $41.7 million, compared with $14.1 million. Higher debt and interest rates contributed. A one-percentage-point change in the weighted-average rate on variable-rate debt would have changed first-half interest expense by an estimated $4.9 million.
- Adjusted EBITDA increased in dollars, but its margin contracted. Management cited inflation, planned technology investments, and supply disruptions affecting higher-margin printed products, partly offset by pricing and cost actions.
- By segment, Payments revenue grew strongly, largely due to First American; Promotional Solutions adjusted EBITDA fell 31.8% in Q2 amid cost inflation and supply disruption. Cloud Solutions adjusted EBITDA declined 6.9%, while Checks adjusted EBITDA rose 3.0%; management noted ongoing secular declines in checks.
Outlook, risks, and unusual items
- For 2022, management expected revenue growth of 8%–10%, including a full year of First American and business exits; exits were expected to reduce growth by about 2 percentage points. Adjusted EBITDA margin guidance was approximately 18.5%–19.0%, versus 20.2% in 2021. The company expected full-year free cash flow to increase from 2021 and capital expenditures of approximately $105 million.
- Management expected margin improvement in the second half, but cautioned that its outlook depended on macroeconomic conditions, continuing supply-chain constraints, labor availability, inflation, and divestitures. It anticipated sufficient liquidity for operations and debt service over the next 12 months and expected to continue its regular quarterly dividend, subject to board approval.
- In May, Deluxe sold its Australian web-hosting business for net cash proceeds of $17.6 million and recorded a $15.2 million pretax gain. It also sold a facility for net proceeds of $6.9 million and recorded a $2.4 million gain. In April, it sold substantially all assets of its Promotional Solutions strategic-sourcing business; it sold substantially all assets of its retail-packaging business in August, after quarter-end. Management said the sales support a focus on payments and data.
- First-half restructuring and integration expense was $31.5 million. Management expected most related employee reductions and severance payments to be completed by year-end and estimated 2022 savings of about $20 million from employee reductions and $4 million from facility closures, partially offset by other costs.
- After quarter-end, the First American subsidiaries’ FTC order was approved July 29, 2022 and required a $4.9 million payment plus injunctive relief. The filing said the payment and related costs would be drawn from an indemnity holdback and were not expected to materially affect Deluxe.
- The filing disclosed corrections to previously reported First American acquisition pro forma information after errors were identified in historical revenue and net income and related adjustments. The filing provides revised pro forma results; these are informational and not indicative of future results.
Important facts for investors to verify
- How much of reported revenue and Payments growth is organic, and how First American performs against management’s expectations.
- Whether supply constraints, inflation, and pricing trends support the projected second-half margin improvement and full-year guidance.
- Debt-service capacity and exposure to floating rates, including covenant headroom and the large scheduled 2026 debt maturities.
- Whether operating cash flow and free cash flow recover despite higher interest payments, investment needs, and working-capital movements.
- The continuing effects of business exits, the post-quarter retail-packaging sale, and the First American FTC order and indemnity holdback.