Deluxe Corporation — Q1 2022 Form 10-Q
Reporting period: Quarter ended March 31, 2022. Unaudited results; amounts below are in millions of U.S. dollars unless stated otherwise. Deluxe provides payments, cloud, promotional, check, and related business services and products.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $556.0 | $441.3 | +26.0% |
| Gross profit / margin | $306.8 / 55.2% | $262.8 / 59.5% | Margin down 4.3 points |
| Operating income / margin | $30.9 / 5.6% | $36.0 / 8.2% | Income down 14.2% |
| Net income attributable to Deluxe | $9.6 | $24.3 | Down 60.3% |
| Diluted EPS | $0.22 | $0.57 | Down 61.4% |
| Adjusted diluted EPS (non-GAAP) | $1.05 | $1.26 | Down 16.7% |
| Adjusted EBITDA / margin (non-GAAP) | $99.6 / 17.9% | $90.5 / 20.5% | EBITDA up 10.1%; margin down 2.6 points |
| Operating cash flow | $34.3 | $39.6 | Down $5.3 |
| Free cash flow (non-GAAP) | $13.4 | $17.9 | Down $4.5 |
Service revenue rose to $238.7 million from $142.2 million; product revenue was $317.3 million, versus $299.1 million. Interest expense increased to $20.3 million from $4.5 million, principally reflecting debt issued to fund the First American acquisition. The income tax provision was $2.9 million versus $9.2 million; the 2022 effective tax rate was 22.9%.
Segments
| Segment | Revenue | Adjusted EBITDA | Management commentary |
|---|---|---|---|
| Payments | $166.2m, +109.2% | $36.4m, +98.8% | Growth largely reflects First American; segment margin was 21.9%, down 1.2 points. |
| Cloud Solutions | $69.5m, +11.7% | $17.3m, +0.7% | Data-driven marketing growth; margin was 24.9%, down 2.8 points. |
| Promotional Solutions | $133.2m, +7.0% | $16.9m, down 4.3% | Demand and pricing lifted revenue; outsourced product mix and inflation pressured profit. |
| Checks | $187.1m, +6.8% | $82.8m, down 0.9% | New clients and pricing offset secular check declines; margin was 44.3%, down 3.4 points. |
Liquidity, debt, and capital
- At March 31, cash and cash equivalents were $44.1 million. Reported liquidity, defined by the company as cash plus undrawn revolving credit availability, was $383.3 million, including $339.2 million available on its revolver.
- Debt carrying value was $1.692 billion; principal outstanding was $1.711 billion. Net debt, using carrying-value debt less cash, was $1.648 billion. Debt principal increased $8.6 million from year-end.
- Debt includes a $1.057 billion secured term loan, $500 million of 8.0% unsecured notes due 2029, and $153 million drawn on the revolving facility. A $200 million interest-rate swap fixes that portion of variable-rate debt at 1.798% before the applicable credit spread. A one-percentage-point rate change was estimated to change quarterly interest expense by $2.5 million based on Q1 average variable-rate debt.
- Debt covenants were met at quarter-end. The company expected to remain compliant over the next 12 months and said available cash, operating cash generation, and revolver capacity should fund operations and obligations over that period.
- Quarterly dividends paid were $13.3 million; the declared dividend rate reflected in equity was $0.30 per share. No shares were repurchased under the authorization during Q1; shares withheld for employee tax obligations should not be confused with open-market repurchases.
Changes, outlook, and notable items
- Revenue growth was driven substantially by First American, acquired in June 2021, which contributed $83.3 million of Q1 revenue and $18.2 million of Payments adjusted EBITDA. Revenue also benefited from new business, demand, and pricing. First American added acquisition amortization and financing costs.
- Net income and margins faced higher interest expense, acquisition-related amortization, technology and other transformation investments, wage, material and delivery inflation, and weaker secular demand for checks and business forms. Promotional Solutions product mix also weighed on profitability. Pricing, cost reductions, and First American partially offset these pressures.
- Management forecast 2022 revenue growth of 8%–10% versus 2021 revenue of $2.022 billion, including a full year of First American revenue, and adjusted EBITDA margin of approximately 20.0% versus 20.2% in 2021. It expected margin to improve through the year. Capital expenditures were projected at approximately $105 million.
- Segment outlook: Payments revenue growth in the high single digits and full-year margin in the low 20% range; Cloud Solutions revenue flat to down in the low single digits and margin in the low-to-mid 20% range; Promotional Solutions revenue growth in the low single digits and margin in the mid-teens; Checks revenue expected to decline in the low single digits for the remainder of the year.
- In May 2022, after quarter-end, Deluxe completed the sale of its Australian web hosting business for $20 million cash and anticipated a Q2 gain. The business had generated $23.8 million of 2021 Cloud Solutions revenue. Its assets and liabilities were classified as held for sale at March 31.
- The company recorded out-of-period correcting adjustments that reduced Q1 2022 net income attributable to Deluxe by $2.2 million; it said the adjustments were not material to any historical interim or annual period. It also revised previously reported First American pro forma information for errors.
- Restructuring and integration expense was $16.3 million, compared with $15.2 million. Most related employee reductions and severance payments were expected to be completed by mid-2022; management estimated 2022 savings of about $19 million in SG&A and $4 million from facility closures, partly offset by other cost increases.
- Management cited ongoing uncertainty from COVID-19 disruption, supply-chain constraints, labor availability, inflation, and the impact of the divestiture. It cautioned that interim results are not necessarily indicative of full-year results. Identified litigation reserves were not material, although unfavorable rulings could have a material future impact. The filing reported no significant change in risk factors from the 2021 Form 10-K.
Key facts for investors to verify
- How much of reported revenue and Payments growth is recurring organic growth versus the First American acquisition, and how the Australian sale affects future Cloud Solutions comparisons.
- Whether margin recovery and 2022 guidance remain achievable amid inflation, supply constraints, business mix, and planned technology investments.
- Debt reduction capacity, variable-rate exposure, covenant headroom, and cash generation after capital expenditures, dividends, and debt service.
- The composition and expected duration of restructuring costs, acquisition amortization, and other adjustments excluded from non-GAAP measures.
- The effects of the $2.2 million out-of-period adjustment, revised acquisition pro forma information, and anticipated gain on the Australian business sale.