Deluxe Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Deluxe provides Payments, Cloud Solutions, Promotional Solutions and Checks offerings. Comparisons are with Q1 2020 unless stated otherwise. Financial amounts below are in millions except per-share data.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Revenue | $441.3 | $486.4; down 9.3% |
| Gross profit / gross margin | $262.8 / 59.5% | $284.4 / 58.5% |
| Operating income (loss) | $36.0 | $(60.8) |
| Net income (loss) | $24.3 | $(60.1) |
| Diluted EPS | $0.57 | $(1.45) |
| Adjusted diluted EPS (non-GAAP) | $1.26 | $1.08 |
| Adjusted EBITDA / margin (non-GAAP) | $90.5 / 20.5% | $83.3 / 17.1% |
| Operating cash flow / free cash flow (non-GAAP) | $39.6 / $17.9 | $26.5 / $12.2 |
| Capital expenditures | $21.7 | $14.3 |
| Cash and cash equivalents | $125.4 | $123.1 at Dec. 31, 2020 |
| Total debt / net debt (non-GAAP) | $840.0 / $714.6 | $840.0 / $716.9 at Dec. 31, 2020 |
| Liquidity (non-GAAP) | $427.8 | $425.5 at Dec. 31, 2020 |
Gross margin is calculated from reported revenue and cost of revenue. Liquidity comprises cash and $302.3 million available on the revolving facility; it does not include $109.1 million of restricted cash held for customers. The facility matures in March 2023, bears a 2.0% weighted-average rate, and had $840.0 million drawn. The company reported covenant compliance.
Material changes and operating drivers
- Revenue fell primarily because of pandemic-related weakness in promotional spending, check usage and Cloud Solutions marketing campaigns, alongside secular declines in checks and business forms. Cloud web and hosted revenue also reflected the exit of certain product lines.
- Segment revenue: Payments $79.4 million, up 3.1%; Cloud Solutions $62.2 million, down 18.1%; Promotional Solutions $124.5 million, down 12.8%; Checks $175.1 million, down 8.2%. Adjusted EBITDA improved in Cloud Solutions and Promotional Solutions, but declined in Checks.
- Net income improved substantially, largely because Q1 2020 included $90.3 million of asset impairment charges; none were recorded in Q1 2021. Lower bad-debt expense, cost savings and reduced interest expense also helped. Q1 2021 included $2.8 million of acquisition transaction costs.
- Adjusted EBITDA rose 8.6% and its margin increased 3.4 percentage points, reflecting cost reductions and lower bad-debt expense despite lower revenue. Management reported operating cash flow up $13.1 million and free cash flow up $5.7 million.
- Q1 2020 cash-flow figures were revised to correct prior presentation errors in debt activity and unpaid capital expenditures. The filing states the revisions did not affect total assets, liabilities, equity or net income.
Outlook, risks and notable items
- 2021 outlook excludes the pending First American acquisition: sales-driven revenue growth of 0%–2%, mid-single-digit revenue growth exiting the year, adjusted EBITDA margin of 20%–21%, and an effective tax rate of approximately 25%. Planned capital expenditures are approximately $90 million. Management expects to continue the regular quarterly dividend, subject to board approval.
- Management expects operating cash generation, cash on hand and facility availability to support the next 12 months, including debt service and expected acquisition-related debt; it anticipated remaining in covenant compliance.
- Management cited continuing uncertainty from COVID-19, including potential effects on demand, asset impairment estimates, distributor receivables, inventory obsolescence and self-insurance estimates. It cautioned actual outcomes may differ materially from estimates.
- On April 21, 2021, Deluxe agreed to acquire First American Payment Systems for $960 million cash, subject to customary adjustments, and expected closing in Q2 2021, subject to conditions and regulatory review. First American generated approximately $290 million of 2020 revenue. Deluxe obtained a $2.2 billion financing commitment and expects to fund the purchase with cash and new debt. Certain potential post-closing losses connected to an FTC investigation of First American subsidiaries are subject to limited indemnification and an indemnity holdback.
- Other disclosed commitments include an uncommenced 16-year facility lease with an approximately $43 million obligation and a SaaS contract extension that increased contractual obligations by approximately $42 million. Litigation accruals were not material, though the company noted litigation outcomes are inherently uncertain.
Important facts for investors to verify
- Whether the First American acquisition closed on expected terms, the final purchase consideration and the resulting debt, interest expense and covenant headroom.
- Whether revenue recovery and the 2021 outlook were achieved, particularly in Cloud Solutions, Promotional Solutions and Checks, and whether Payments growth continued.
- Whether margin gains and cash-flow improvement were sustainable beyond cost reductions, lower bad-debt expense and working-capital timing effects.
- Whether COVID-19, distributor credit quality, inventory reserves or other estimates led to additional impairment or expense.
- Whether planned capital spending, restructuring savings, dividends and liquidity remained consistent with management’s expectations.