Deluxe Corporation — Q2 2023 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Deluxe provides payments, data and marketing, promotional products, checks and business forms through four segments: Payments, Data Solutions, Promotional Solutions and Checks. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $571.7 | $563.0 | $1,117.1 | $1,119.0 |
| Gross profit | $301.7 | $298.8 | $596.4 | $605.7 |
| Operating income | $54.1 | $51.6 | $88.3 | $82.4 |
| Net income | $16.4 | $22.1 | $19.2 | $31.8 |
| Diluted EPS | $0.37 | $0.50 | $0.44 | $0.72 |
| Adjusted EBITDA (non-GAAP) | $108.4 | $101.7 | $208.8 | $201.4 |
| Adjusted EBITDA margin (non-GAAP) | 19.0% | 18.1% | 18.7% | 18.0% |
Q2 revenue increased 1.6%; first-half revenue was down 0.2%. First-half GAAP net income fell 39.6% and diluted EPS fell 38.9%. First-half adjusted diluted EPS was $1.73, down from $2.05. Adjusted EBITDA and margin improved in both periods, while gross margin narrowed: cost of revenue was 47.2% of revenue in Q2 and 46.6% in the first half, versus 46.9% and 45.9%, respectively.
Cash flow and liquidity. First-half operating cash flow was $47.3, versus $72.2 in 2022; capital expenditures were $55.9, producing negative free cash flow of $8.6 versus positive $26.9 (free cash flow is non-GAAP). Cash and cash equivalents were $39.1 at June 30. Reported liquidity, defined by the company as cash plus undrawn revolver availability, was $283.7, including $244.6 available on the revolving facility. Customer funds and restricted cash are not equivalent to unrestricted corporate cash.
Debt and balance sheet. Total debt principal was $1.681 billion ($1.667 billion net of discount and issuance costs), versus $1.659 billion principal at year-end 2022; net debt was $1.628 billion. Total debt carried a 7.1% weighted-average rate, and the company reported 76% of debt fixed-rate, including swaps that hedge $798.7 million of variable-rate debt. Long-term debt maturities include $974.5 million in 2026 and $475 million thereafter. The company was in compliance with its debt covenants at June 30.
Material changes and segment performance
- Q2 revenue growth reflected pricing, new business and a $9 million increase in data-driven marketing; divestitures reduced Q2 revenue by about $6 million. First-half revenue was affected by about $19 million of divestiture-related reductions and secular declines in checks, forms and some accessories, largely offset by pricing and growth elsewhere.
- Payments Q2 revenue rose 1.9% and adjusted EBITDA rose 3.8%; first-half revenue increased 2.7%. Management expects mid-single-digit full-year segment revenue growth.
- Data Solutions Q2 revenue increased 5.1%, supported by demand for data-driven marketing; first-half revenue declined 5.4%, with web hosting churn and divestitures weighing on results. The company completed the sale of its North American web hosting and logo design businesses in June for net proceeds of $31.2 million and recorded a $21.9 million pretax gain. Those businesses had 2022 annual revenue of approximately $66 million.
- Promotional Solutions Q2 revenue was nearly flat, while adjusted EBITDA rose 45.5%; first-half adjusted EBITDA rose 27.0%. Cost actions and pricing supported margins.
- Checks Q2 revenue rose 1.4%, but first-half revenue declined 1.6%; management cited ongoing secular volume declines. First-half adjusted EBITDA declined 3.2%.
Outlook, management commentary and risks
- For 2023, management expects revenue of $2.18–$2.22 billion and adjusted EBITDA of $400–$415 million. 2022 included approximately $52 million of revenue and $14 million of adjusted EBITDA from businesses divested before or during 2023, which will not recur.
- Management expects approximately $100 million of 2023 capital expenditures and anticipates continuing the regular quarterly dividend, subject to board approval. It expects cash generation, existing cash and revolver availability to support operations, debt service and contractual obligations for the next 12 months.
- Management cited rising interest expense, inflation in wages, materials and delivery, labor and supply-chain challenges, technology and transformation investments, and secular declines in checks, forms and some accessories. It also noted customer churn in North American web hosting and cost pressure during Payments lockbox consolidation.
- First-half interest expense increased 48.7% to $61.9 million, principally due to higher rates. Operating cash flow was reduced by higher interest payments, bonus payments and income taxes. Management estimates a one-percentage-point change in the weighted-average rate on first-half variable-rate debt would change interest expense by $3.5 million.
- Restructuring and integration expense was $27.5 million in Q2 and $41.6 million for the first half, compared with $15.2 million and $31.5 million. The company expects most related employee reductions and severance payments to be completed by year-end 2023; it estimated 2023 savings from workforce actions and facility closures, while cautioning that higher labor and other costs may offset them.
- The first-half effective tax rate was 35.1%, compared with 29.7% in the first half of 2022. The filing cites business exit activity, foreign tax effects and share-based compensation among the factors affecting the rate; it recorded a valuation allowance against a tax asset related to the North American business sale.
- Litigation and recorded legal liabilities were described as not material, though the company cautioned that an unfavorable ruling could have a material effect in the period incurred. It reported no significant changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether full-year revenue and adjusted EBITDA guidance remains achievable given divestitures, secular product declines, inflation and segment trends.
- Debt reduction, refinancing and covenant headroom, particularly ahead of the substantial 2026 maturities, as well as sensitivity to interest rates.
- Whether operating cash flow and free cash flow recover after the first-half decline and fund capital spending, dividends and debt service.
- Whether Payments and data-driven marketing growth and expected restructuring savings offset declines in checks, forms and web hosting.
- The comparability and composition of non-GAAP adjusted EBITDA, adjusted EPS, free cash flow and liquidity; these measures are not substitutes for GAAP results.