Deluxe Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Deluxe provides payments, data and marketing, promotional products, checks, and business forms. The company reported four segments: Payments, Data Solutions, Promotional Solutions, and Checks. Unless stated otherwise, figures below are in millions of dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $537.8 | $555.0 | $1,654.9 | $1,674.0 |
| Gross profit | $282.7 | $298.8 | $879.2 | $904.5 |
| Gross margin | 52.6% | 53.8% | 53.1% | 54.0% |
| Operating income | $21.6 | $41.6 | $109.8 | $124.1 |
| Net income (loss) attributable to Deluxe | $(8.0) | $14.7 | $11.1 | $46.4 |
| Diluted EPS | $(0.18) | $0.34 | $0.25 | $1.06 |
| Adjusted diluted EPS | $0.79 | $0.99 | $2.53 | $3.04 |
| Adjusted EBITDA | $101.9 | $104.6 | $310.7 | $305.9 |
| Adjusted EBITDA margin | 18.9% | 18.8% | 18.8% | 18.3% |
| Interest expense | $32.0 | $23.8 | $94.0 | $65.5 |
Q3 revenue declined 3.1% year over year; nine-month revenue declined 1.1%. Nine-month operating cash flow was $114.9 million, versus $123.4 million, and free cash flow was $34.1 million, versus $50.0 million. Capital expenditures were $80.8 million. The cash-flow statement reports a $148.4 million decrease in cash, cash equivalents, and restricted cash, largely reflecting the seasonal reduction in customer funds held.
At September 30, 2023, cash and cash equivalents were $42.2 million; debt carrying value was $1.63 billion and net debt was $1.59 billion. Revolver availability was $258.9 million, giving reported liquidity of $301.1 million. Debt principal was $1.64 billion. The weighted-average rate on credit-facility borrowings was 6.78%; swaps fixed the rate on $787.9 million of variable-rate debt. The company reported compliance with debt covenants.
Material changes and segment performance
- Higher interest rates drove a 34.6% rise in Q3 interest expense and a 43.5% rise for the first nine months, despite lower average debt outstanding. Management estimated that a one-percentage-point rate change would affect Q4 interest expense by about $1.0 million.
- Q3 segment revenue: Payments $169.5 million (down 0.2%); Data Solutions $64.1 million (down 4.0%); Promotional Solutions $124.3 million (down 8.7%); Checks $180.0 million (down 1.3%). Nine-month adjusted EBITDA increased in Payments and Promotional Solutions, but decreased in Data Solutions and Checks.
- Management cited growth in data-driven marketing and merchant services, pricing actions, and cost reductions as offsets to declining check, business-form, and accessory volumes; distributor-channel softness; inflation in labor, materials, and delivery; and business exits.
- In June 2023, Deluxe sold its North American web hosting and logo design businesses, which had generated approximately $66 million of 2022 revenue. Q3 included a $4.5 million reduction to the gain on that sale from an out-of-period correction; the filing says it was not material to current or prior periods. In September, Deluxe agreed to exit its U.S. payroll business; it received $10 million in advance consideration, with final consideration dependent on customer conversion and retention in 2024.
Outlook, management commentary, and risks
- 2023 guidance: revenue of $2.18–$2.22 billion and adjusted EBITDA of $405–$420 million. The company noted that 2022 revenue and adjusted EBITDA included approximately $52 million and $14 million, respectively, that will not recur due to business exits.
- North Star targets a $100 million run-rate improvement in free cash flow and an $80 million run-rate improvement in adjusted EBITDA by 2026. Management expected about $10 million of benefit in Q4 2023, reported approximately $35 million of costs incurred through September, and expected another $80–$100 million of costs over the following two years. Most related employee reductions and severance payments were expected to be completed by Q1 2024.
- Management expected 2023 capital expenditures of approximately $100 million and said cash generation, cash on hand, and revolver availability should support operations, debt service, and capital needs for the next 12 months. It expected to continue regular quarterly dividends, subject to board approval.
- Key risks discussed include persistent interest-rate, inflation, labor and supply-chain pressures; secular volume declines in checks, forms, and some accessories; business-exit effects; and the execution and cost of restructuring and growth investments. The company also disclosed approximately $130 million of additional contractual commitments, with $65 million due through 2024. Identified litigation liabilities were not material, but the filing cautions that adverse rulings could have a material effect. No significant changes to the 2022 Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether the 2023 revenue and adjusted EBITDA guidance remains achievable given the reported year-to-date results, business exits, and underlying segment trends.
- Whether North Star delivers its targeted savings and cash-flow improvements, and how much of the planned restructuring cost is ultimately incurred.
- Debt covenant headroom, refinancing and repayment requirements, and sensitivity to interest rates as debt matures, particularly in 2026.
- Whether free cash flow can support debt reduction, capital investment, and dividends after capital expenditures and required debt service.
- Customer conversion and retention outcomes for the payroll exit, and the final consideration expected to be determined in mid-2024.