Deluxe Corporation — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter ended March 31, 2020, compared with the quarter ended March 31, 2019. Deluxe provides payments, cloud, promotional and check-related products and services. Effective January 1, 2020, it reorganized into four reporting segments: Payments, Cloud Solutions, Promotional Solutions and Checks; prior-period segment data was recast.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $486.4 million | $499.1 million; down 2.5% |
| Gross profit and margin | $284.4 million; 58.5% | $299.4 million; 60.0% |
| Operating income (loss) | $(60.8) million | $63.8 million |
| Net income (loss) | $(60.1) million | $41.2 million |
| Diluted EPS | $(1.45) | $0.93 |
| Adjusted diluted EPS (non-GAAP) | $1.08 | $1.54 |
| Adjusted EBITDA and margin (non-GAAP) | $83.3 million; 17.1% | $113.7 million; 22.8% |
| Operating cash flow | $18.6 million | $45.4 million |
Service revenue rose to $155.7 million from $148.5 million, while product revenue fell to $330.7 million from $350.5 million. Cost of revenue increased 1.2% despite lower sales, and was 41.5% of revenue versus 40.0%, reflecting a shift toward services and their higher costs. SG&A increased 3.1% to $237.2 million.
Segments: Payments revenue increased 18.3% to $77.0 million, chiefly from new lockbox outsourcing deals; adjusted EBITDA was $18.0 million. Cloud Solutions revenue declined 3.0% to $75.9 million and adjusted EBITDA declined 12.5% to $14.9 million. Promotional Solutions revenue declined 8.4% to $142.8 million and adjusted EBITDA declined 52.5% to $11.2 million. Checks revenue declined 4.6% to $190.6 million and adjusted EBITDA declined 11.3% to $90.7 million.
At March 31, 2020, cash and cash equivalents were $310.1 million; total cash, cash equivalents and restricted cash were $385.8 million. Long-term debt was $1.14 billion, up $256.5 million from year-end. Current assets were $686.2 million and current liabilities $358.7 million. Shareholders’ equity was $474.0 million. The company paid $12.7 million in dividends and repurchased $14.0 million of shares during the quarter.
Material changes versus the prior comparable period
- Management estimated COVID-19 reduced quarterly revenue by approximately $16 million: about $7 million in Promotional Solutions, $5 million in Cloud Solutions and $4 million in Checks.
- COVID-19-related demand weakness and lower expected cash flows triggered $90.3 million of impairment charges, including $67.7 million of goodwill impairment and impairments of other assets. The charges drove the GAAP operating and net losses.
- Adjusted EBITDA fell 26.7%; management cited legacy checks and forms declines, prior loss of web-hosting revenue, strategic investments and onboarding costs for treasury-management clients, COVID-19 effects, and $5.4 million of bad-debt expense on a Safeguard distributor note.
- Payments lockbox revenue increased approximately $11 million, partially offsetting declines elsewhere. Interest expense decreased 24.8% to $7.0 million, primarily because of lower average interest rates.
- Operating cash flow fell by $26.8 million year over year. Financing cash flow included a net $256.5 million increase in debt, including a $238 million draw in March in response to pandemic uncertainty.
Outlook, management commentary and risks
- Deluxe did not provide detailed 2020 financial guidance, citing significant uncertainty. Management expected Payments to deliver year-over-year revenue growth; it viewed delayed Cloud Solutions marketing campaigns as potentially temporary but warned web-hosting revenue depended on small-business resilience. Promotional Solutions faced the largest decline, while Checks revenue was expected to weaken with the economy and longer-term secular trends.
- Management expected lower consolidated gross margin until pandemic effects moderate and anticipated additional pandemic-response costs. It paused certain spending, reduced discretionary expenditures, implemented salary reductions and furloughs, and deferred or delayed selected projects and capital spending.
- The company said it expected operating cash generation and cash on hand to meet commitments for the next 12 months, planned to maintain current debt near term, and anticipated continuing its regular quarterly dividend, subject to board approval. It reported covenant compliance at quarter-end and expected to remain compliant, but noted uncertainty and possible need for further liquidity measures.
- Only $4.6 million was available for borrowing under the $1.15 billion revolving facility at quarter-end after outstanding borrowings and letters of credit. An increase in facility size to as much as $1.425 billion requires lender consent. The facility matures in March 2023.
- Further impairments or bad-debt expense may arise if economic conditions, small-business failures or distributor credit quality are worse than management’s assumptions. The company granted distributors April loan forbearance and May principal-payment forbearance.
- Management cited potential disruption to operations and suppliers, lower demand and margins, added operating costs, cybersecurity and data-security risks from remote work, and uncertainty around the pandemic’s duration and effects. Recorded litigation liabilities were not material, though unfavorable rulings could have future adverse effects.
Most important facts for investors to verify
- Whether subsequent results confirm or worsen the estimated COVID-19 revenue impact, small-business customer losses and assumptions underlying the $90.3 million impairment charge.
- Debt covenant headroom, refinancing and liquidity capacity, particularly given the facility’s near-full utilization and limited remaining availability.
- Whether operating cash flow recovers without further reliance on borrowing, and whether the dividend and planned investment levels remain sustainable.
- Collection risk in Safeguard distributor loans and notes, including the $5.4 million bad-debt charge and subsequent effects of forbearance.
- Performance of Payments growth initiatives and recovery, if any, in Cloud and Promotional Solutions, alongside continuing secular declines in checks and forms.