Deluxe Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results. Deluxe provides Payments, Cloud Solutions, Promotional Solutions, and Checks products and services. All amounts below are in millions of dollars, except per-share data and percentages. Comparatives reflect the company’s 2020 segment realignment.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $439.5 | $493.6 | $1,336.3 | $1,486.6 |
| Gross profit / margin | $265.0 / 60.3% | $289.9 / 58.7% | $797.5 / 59.7% | $880.8 / 59.2% |
| Operating income (loss) | $44.4 | $(340.7) | $7.9 | $(225.1) |
| Net income (loss) attributable to Deluxe | $29.4 | $(318.5) | $(15.9) | $(244.7) |
| GAAP diluted EPS | $0.70 | $(7.49) | $(0.40) | $(5.65) |
| Adjusted diluted EPS | $1.47 | $1.71 | $3.70 | $4.88 |
| Adjusted EBITDA / margin | $102.5 / 23.3% | $119.3 / 24.2% | $269.7 / 20.2% | $350.5 / 23.6% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $166.8 | $208.0 |
| Free cash flow | Not provided for quarter | Not provided for quarter | $124.1 | $158.3 |
Q3 revenue fell 11.0% year over year; nine-month revenue fell 10.1%. Nine-month results include $98.0 million in asset impairment charges, versus $391.0 million in the prior-year period. Q3 included $2.8 million of impairment charges, versus $391.0 million in Q3 2019. These charges substantially affect comparisons of reported earnings.
Segments
| Q3 segment | Revenue, year-over-year change | Adjusted EBITDA, year-over-year change |
|---|---|---|
| Payments | $74.7; up 15.5% | $16.7; down 2.6% |
| Cloud Solutions | $63.8; down 20.3% | $16.4; down 18.8% |
| Promotional Solutions | $124.9; down 20.3% | $21.5; down 6.2% |
| Checks | $176.1; down 8.4% | $85.0; down 14.0% |
Payments growth was led by treasury management, up 20.9% in Q3. COVID-19-related demand weakness particularly affected Promotional Solutions and Cloud Solutions; Checks also faced pandemic effects and ongoing secular volume declines. Promotional Solutions recorded $29.5 million of PPE revenue in the first nine months, primarily in Q2.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $310.4 million; total debt was $1.040 billion and net debt was $729.6 million. Net debt was down from $809.9 million at December 31, 2019.
- Revolver availability was $102.6 million after letters of credit; reported liquidity, including cash and available borrowing, was $413.0 million. An additional $89.6 million of restricted customer funds was included in funds held for customers and should not be treated as unrestricted cash.
- The company drew $238 million on its $1.15 billion revolving facility in March. It repaid $100 million in July and a further $140 million in October, after quarter-end; the October repayment remained available for reborrowing. The facility matures in March 2023.
- Nine-month capital spending was $42.7 million. The company paid $38.1 million in dividends and repurchased $14.0 million of shares during the period; it made no share repurchases in Q3.
- Management reported compliance with debt covenants and expected available cash, operating cash flow, and borrowing capacity to cover commitments over the next 12 months.
Outlook, commentary, and risks
- Management withheld detailed 2020 guidance because of COVID-19 uncertainty. It expected Q4 revenue to be softer year over year than Q3, including low- to mid-single-digit Payments growth due to implementation delays, and lower Cloud Solutions revenue. It expected Q4 adjusted EBITDA margin to remain at its long-term target of 20% or better.
- The company expects to continue its regular quarterly dividend, subject to board approval. It expects more than $10 million of annual operating expense savings once planned closures of over 30 facilities are complete; closures are expected to continue through 2021.
- COVID-19 could further weaken demand, delay customer implementations, disrupt operations, increase credit losses, or prompt additional impairment charges. Management noted the pandemic’s effects on small-business customers and uncertainty about its severity and duration.
- Goodwill and other asset impairment charges in 2020 totaled $98.0 million, primarily involving Promotional Solutions and Cloud Solutions Web Hosting. The annual impairment analysis recorded no additional goodwill charges, but estimates are sensitive to future revenue, expenses, and discount rates.
- Other notable items include $57.0 million of nine-month restructuring and integration expense, a $3.6 million retained-earnings reduction upon adoption of the expected-credit-loss standard, and $19.6 million of capitalized cloud-computing implementation costs related primarily to the planned ERP system.
- Recorded litigation liabilities were not material, although the filing cautions that an unfavorable ruling could adversely affect results or liquidity. Two new facility leases signed in Q3 add approximately $65 million of future lease obligations and had not commenced at quarter-end.
Important facts for investors to verify
- Whether revenue and margins recover, particularly in Promotional Solutions, Cloud Solutions, and Checks, and whether Payments implementation delays materialize.
- How much of reported earnings and adjusted performance reflects recurring operations versus impairments, restructuring, and other excluded items.
- Debt reduction, revolver availability, covenant headroom, and the company’s ability to sustain dividends if the downturn persists.
- Whether distributor receivable losses, further goodwill or asset impairments, and planned cost savings develop as management estimates.
- The timing, costs, and benefits of facility closures and transformation investments, including the ERP implementation.