Deluxe Corporation — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 31, 2023. Unaudited results; comparisons are with the quarter ended March 31, 2022. Dollar figures below are in U.S. dollars.
Business context and financial results
Deluxe provides payments, treasury management, data and marketing, promotional products, checks, and business forms. It reports four segments: Payments, Data Solutions, Promotional Solutions, and Checks.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $545.4 million | $556.0 million | (1.9%) |
| Gross profit / margin | $294.7 million / 54.0% | $306.8 million / 55.2% | Margin down 1.2 pts. |
| Operating income / margin | $34.1 million / 6.3% | $30.9 million / 5.6% | Operating income up 10.5% |
| Net income | $2.8 million | $9.7 million | Down 71.3% |
| Diluted EPS | $0.06 | $0.22 | Down 72.7% |
| Adjusted diluted EPS (non-GAAP) | $0.80 | $1.05 | Down 23.8% |
| Adjusted EBITDA / margin (non-GAAP) | $100.4 million / 18.4% | $99.6 million / 17.9% | EBITDA up 0.8%; margin up 0.5 pts. |
Revenue declined mainly because of divestitures, secular volume declines in checks and business forms, and ERP implementation impacts; pricing and new business partly offset these factors. Cost of revenue rose 0.6% despite lower revenue, with inflation and investment contributing to a 1.2-point increase in its share of revenue. SG&A fell 4.6%, reflecting cost reductions and lower amortization, partly offset by technology investment.
Segments
- Payments: Revenue $172.0 million, up 3.5%; adjusted EBITDA $36.6 million, up 0.3%. Merchant services and treasury management grew; margin declined to 21.3% from 21.9% amid lockbox consolidation costs.
- Data Solutions: Revenue $58.6 million, down 15.7%; adjusted EBITDA $15.3 million, down 11.6%. Divestiture, customer churn, and marketing campaign timing weighed on results.
- Promotional Solutions: Revenue $136.1 million, up 2.2%; adjusted EBITDA $18.8 million, up 11.0%. New business, pricing, and cost actions supported growth.
- Checks: Revenue $178.6 million, down 4.5%; adjusted EBITDA $76.5 million, down 7.6%. Secular volume declines and ERP impacts partly offset pricing and cost savings.
Cash flow, debt, and liquidity
- Operating cash flow was negative $6.7 million, versus positive $34.3 million a year earlier; free cash flow, a non-GAAP measure, was negative $32.2 million versus positive $13.4 million.
- Management attributed weaker cash flow principally to higher interest, bonus and tax payments, plus temporary working-capital impacts from ERP implementation. Capital expenditures were $25.5 million, compared with $20.8 million.
- At March 31, cash and cash equivalents were $24.6 million; total debt was $1.687 billion and net debt was $1.662 billion. Available revolving-credit capacity was $239.2 million; reported liquidity (cash plus available capacity) was $263.8 million.
- Debt principal was $1.701 billion. The weighted-average rate on credit-facility borrowings was 6.72%; 57% of debt was fixed-rate, including $500 million of variable-rate debt hedged by swaps. A one-percentage-point rate change would have changed quarterly interest expense by an estimated $1.8 million, based on average variable-rate debt.
- Quarterly dividend was $0.30 per share. The company reported compliance with debt covenants at quarter-end and expected to remain compliant over the next 12 months.
Funds held for customers and the corresponding customer-funds liability both declined sharply from year-end due to seasonal customer tax-payment flows; these balances should not be interpreted as unrestricted company cash.
Outlook, management commentary, and material items
- For 2023, management projected revenue of $2.145–$2.210 billion and adjusted EBITDA of $390–$405 million. The 2022 comparison included approximately $63 million of revenue and $19 million of adjusted EBITDA that will not recur because of divestitures. Management expected about $100 million in capital expenditures and planned to continue the regular quarterly dividend, subject to board approval.
- Payments full-year revenue growth was expected in the mid-single digits; Checks revenue was expected to decline mid-single digits. Outlook also reflected anticipated divestiture effects in Data Solutions and Promotional Solutions.
- In January 2023, Deluxe agreed to sell its North American web hosting and logo design businesses for $42 million, plus up to $10 million contingent on post-closing performance. The businesses generated approximately $66 million of 2022 revenue. Closing was expected in May 2023, with a gain anticipated.
- Management cited inflation in wages, materials, and delivery; labor and supply-chain constraints; secular declines in checks, forms, and certain accessories; and higher interest expense as ongoing pressures. It said recent bank failures had not materially affected the business.
- The company completed the final phase of its ERP modernization during the quarter. Implementation caused temporary working-capital effects and one-time operating impacts. Management expected future cost and scale benefits. Restructuring and integration expense was $14.1 million; expected 2023 savings were approximately $25 million from workforce actions and $3 million from facility closures, subject to offsetting costs.
- The effective tax rate was 57.5%, versus 22.9% in Q1 2022. The filing attributes the increase chiefly to acquisition and business-exit activity and share-based compensation; a valuation allowance against a deferred tax asset related to the pending sale also affected the quarter.
- Recorded legal liabilities were not material, but the filing cautions that litigation outcomes are inherently uncertain and an unfavorable ruling could materially affect results in the period incurred. Management reported no significant changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether the web hosting and logo design sale closed on the expected terms and timing, and whether contingent proceeds or a gain were realized.
- Whether management delivered its 2023 revenue and adjusted EBITDA outlook, including the effects of divestitures and any changes in assumptions.
- Whether cash conversion improves after ERP implementation and seasonal customer-funds movements, given negative Q1 operating and free cash flow.
- Debt, interest expense, available revolver capacity, and covenant headroom as rates and operating performance change.
- Whether pricing and cost savings can offset inflation and secular volume declines, especially in Checks and Data Solutions.
- The continuing impact of the elevated effective tax rate and other nonrecurring or adjusted-EPS exclusions on GAAP earnings.