Deluxe Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 21, 2020. Deluxe provides technology-enabled business, payment, marketing, treasury-management, web and promotional services, as well as checks and forms. The 2019 reportable segments were Small Business Services, Financial Services and Direct Checks.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 | Change or context |
|---|---|---|---|
| Revenue | $2,008.7 million | $1,998.0 million | Up 0.5%; acquisitions and price increases partly offset declining check and forms volumes. |
| Gross profit margin | 59.5% | 60.4% | Down 0.9 percentage points. |
| Operating income (loss) | $(158.1) million | $231.2 million | Includes $391.0 million of asset impairment charges. |
| Net income (loss) | $(199.9) million | $149.6 million | Diluted EPS was $(4.65), versus $3.16. |
| Adjusted diluted EPS | $6.82 | $6.88 | Non-GAAP; down 0.9%. |
| Adjusted EBITDA | $480.9 million | $509.3 million | Non-GAAP; down approximately 5.6%. |
| Operating cash flow | $286.7 million | $339.3 million | Down $52.7 million. |
| Cash and cash equivalents | $73.6 million | $59.7 million | Excludes $101.2 million of restricted cash held for customers. |
| Total debt | $883.5 million | $911.9 million | Revolving credit facility; weighted-average year-end rate of 3.0%. |
Capital expenditures were $66.6 million, and cash dividends paid were $51.7 million. Net available borrowing under the $1.15 billion revolving credit facility was $261.1 million at year-end; the facility matures in March 2023. The company reported compliance with its debt covenants. Its quarterly dividend was $0.30 per share, or $1.20 for the year.
In fourth-quarter 2019, revenue was $522.1 million versus $524.7 million in fourth-quarter 2018; net income was $44.8 million versus $57.2 million, and diluted EPS was $1.06 versus $1.25.
Material changes and segment trends
- Marketing solutions and other services rose to 44.1% of revenue from 42.0%; checks declined to 39.0% from 40.6%, reflecting portfolio diversification alongside continued check-market contraction.
- Small Business Services revenue declined 2.2% to $1,255.8 million. Its operating loss was $124.2 million, including substantial impairment and restructuring costs.
- Financial Services revenue rose 7.9% to $633.5 million, helped by acquired treasury-management businesses and data-driven marketing. Its operating loss was $67.5 million, also affected by impairments and restructuring.
- Direct Checks revenue fell 6.3% to $119.4 million; operating income declined 18.9% to $33.6 million.
- Service revenue increased to 29.8% of consolidated revenue from 27.3%. Acquisitions contributed approximately $65.1 million of 2019 revenue; acquisitions were funded through the revolving credit facility.
Outlook, commentary and risks
- For 2020, management forecast revenue of $2.000–$2.040 billion, adjusted EBITDA of $410–$435 million and adjusted diluted EPS of $5.50–$5.95. Management expected adjusted EBITDA and adjusted EPS to decline, citing mix changes in web hosting and data-driven marketing, check declines and contract renewals, plus planned growth investments.
- Deluxe planned approximately $70 million of 2020 technology-platform investment and approximately $70 million of capital expenditures. It expected operating cash flow and facility availability to fund operations and anticipated maintaining the current dividend, subject to quarterly board approval. Share repurchases were expected to be lower than in recent years.
- Effective January 1, 2020, the company reorganized around Payments, Cloud Solutions, Promotional Solutions and Checks, with the first financial reporting under the new segment structure planned for first-quarter 2020. Management identified Payments and Cloud Solutions as primary growth platforms.
- The 2019 impairment charge included $242.3 million for Small Business Services Web Services goodwill and $115.5 million for Financial Services Data-Driven Marketing goodwill, as well as impairments of certain intangible assets. Management cited underperformance, customer losses or insourcing, and a sustained stock-price decline. Further impairment is possible if assumptions or business conditions weaken.
- Principal risks include secular declines in checks and forms, pricing pressure and customer retention, execution of the company-wide transformation and technology implementations, acquisition integration, cybersecurity and data privacy, economic sensitivity of small businesses, and variable-rate debt. The company noted the California Consumer Privacy Act became effective January 1, 2020.
- Recorded legal liabilities were not material, and management did not expect identified matters to materially affect results; litigation outcomes remain uncertain. The auditor gave an unqualified opinion on the financial statements and internal controls, identifying goodwill impairment valuation as a critical audit matter.
Important facts for investors to verify
- Whether 2020 revenue and adjusted EBITDA/EPS guidance was achieved, and how the company reconciles its non-GAAP measures to GAAP results.
- Whether organic growth in Payments and Cloud Solutions offsets continued declines in checks, forms and legacy services.
- Progress, costs and expected returns from the One Deluxe reorganization and planned technology investments.
- Whether customer retention, contract renewals and performance in the impaired Web Services and Data-Driven Marketing businesses support carrying values, or lead to further impairment.
- Debt, interest expense, covenant headroom and the ability to fund investment and dividends from operating cash flow; distinguish unrestricted cash from customer funds.
- Implementation and compliance costs or business impacts from privacy, cybersecurity and other regulatory requirements.